Norwegian School of Economics Bergen - Spring Semester 2015 The Expansion of Low Cost Carriers into the Long- Haul Market: A Strategic Analysis of Norwegian Air Shuttle ASA Master in International Business Submitted by: Long Chen (S135623) Hubert Pawlikowski (S135618) Supervisor: Stig Tenold Page Count: 98 Words: 39441 This thesis was written as a part of the master programme at NHH. The institution, the supervisor, or the examiner are not - through the approval of this thesis - responsible for the theories and methods used, or results and conclusions drawn in this work.
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Norwegian School of Economics Bergen - Spring Semester 2015
The Expansion of Low Cost Carriers into the Long-
Haul Market: A Strategic Analysis of Norwegian Air
Shuttle ASA
Master in International Business
Submitted by: Long Chen (S135623) Hubert Pawlikowski (S135618) Supervisor: Stig Tenold Page Count: 98 Words: 39441 This thesis was written as a part of the master programme at NHH. The institution, the
supervisor, or the examiner are not - through the approval of this thesis - responsible for the theories and methods used, or results and conclusions drawn in this work.
i |
Execut ive Summary
The low-cost carrier (“LCC”) business model has been in existence for several decades and their
market share has been growing steadily. However, the most successful LCCs such as Southwest,
Ryanair and EasyJet have focused upon implementing the low-cost strategy on short-haul routes.
The main strategic objective of this thesis is to identify the underlying reasons for this phenomenon
and whether there is a potential for the exploitation of the low-cost business model on long-haul
flights. With this objective in mind, we conducted a case study of Norwegian Air Shuttle ASA
(“NAS”), a LCC originating from Norway, and the only LCC currently operating long-haul routes
from Europe to North America and Asia.
The thesis is structured around three main parts; Literature Review, External Analysis and
Internal Analysis. The Literature Review provides the theoretical background. The External Analysis
chapter is split in two. Firstly, we use the PESTLE model to identify the major macroeconomic
factors directly influencing the airline industry. Then we move to the microenvironment analysis that
utilises the Porter’s Five Forces framework to provide a summary of the key issues shaping industry
profitability. The third part, Internal Analysis provides an overview of the company’s history,
financial performance and operational strategies in its long-haul expansion. The Chapter ends with a
SWOT analysis to distinguish the key strengths, weaknesses, opportunities and threats facing NAS.
Ultimately, the VRIO analysis finds that NAS currently lacks the resources to create and maintain
sustainable competitive advantages in the long-haul market.
In fact, the company has even failed to gain a significant price advantage over its competitors,
especially when its LowFare+ product is compared with the fares of legacy airlines offering indirect
services. As such, we conclude the thesis with a Recommendations section, where we propose
several strategic solutions that may improve NAS’ financial and operational performance on its long-
haul routes.
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Acknowledgements
We have completed this thesis with the assistance of many people. In particular, our supervisor,
Stig Tenold, was an important mentor for us and we would like to thank him for his patience and
guidance throughout the whole process. In addition, our family and friends have also contributed in
their own way, and we would not be where we are today without their encouragement and support.
Before continuing further, it should be noted that we have no relevant experience working in the
airline industry nor do we have any personal contacts with anyone in the industry. The thesis topic
was motivated by NAS’ decision to tackle the long-haul market in 2013 with flights from Stockholm
and Oslo to New York and Bangkok. Our interest in the industry stems purely from an interest in
travel and a desire to develop a deeper understanding into how the airline industry operates,
particularly in relation to LCCs. We hope to use the knowledge that we have gained during the
course of our undergraduate and Masters Degrees, specifically in the areas of finance, strategy and
corporate governance, to analyse the issues from a fresh and thorough perspective.
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Abbreviat ions
ASK Available Seat Kilometres
ASEAN Association of Southeast Asian Nations
BA British Airways
CASK Cost per available seat kilometre
CWC Carrier-within-carrier
EBIT Earnings before Interest and Tax
ETS Emissions Trading Scheme
EU European Union
FFP Frequent Flyer Program
GDP Gross Domestic Product
HSR High-Speed Rail
IATA International Air Transportation Association
ICT Information Communication Technology
LCC Low Cost Carrier
NAS Norwegian Air Shuttle ASA
NOK Norwegian Kroners
RASK Revenue per available seat kilometre
ROIC Return on Invested Capital
RPK Revenue Passenger Kilometres
SAS Scandinavian Airlines
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Defini t ions
Aircraft Utilization: the number of hours within a day that an aircraft is actually being used for
flight operations.
Bargaining Power: the ability to extract favourable outcomes from negotiations due to one
party’s strengths and superior position.
Bilateral Agreements: treaties between two sovereign governments which set out the rules
under which international commercial airline services shall operate.
Biofuels: any form of renewable energy that can be derived from biomass such as plants and
algae.
Cabotage: the carriage of air traffic that originates and terminates within the boundaries of a
given country by an airline that is licensed in another country.
Code-Sharing Agreements: a type of enhanced marketing agreement allowing one airline to sell
a seat on a flight operated by another airline.
Deregulation: process whereby regulatory controls over entry, capacity and pricing are
removed.
Economies of Density: economies gained as the number of flights on a particular route
increases due to the fact that fixed costs such as fuel, cabin crew and aircraft servicing are higher
than traffic sensitive costs such as food and ticket handling.
Economies of Scale: the benefits enjoyed by larger firms in the form of lower per unit costs due
to their ability to spread fixed costs over more production units and their stronger bargaining
position.
High Speed Rail: trains that are capable of travelling at much faster speeds than traditional
railways, often exceeding 250km/hr.
Hub: an airport that airlines use as an important transfer point in their route networks to
transport passengers to their final destination.
Interline Agreement: voluntary agreement between airlines allowing passengers to buy a single
ticket for an itinerary on multiple airlines.
Income Elasticity: measures the sensitivity of demand for a good to changes in individual or
aggregate income levels.
Legacy Carriers: airlines that have been in existence prior to deregulation and generally provides
a full-service product offering to their customers.
Load Factor: the amount of seats on any given flight that is actually sold to consumers.
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Long Haul Routes: flights that are longer than 6 hours of flying time.
Low-Cost Carriers: airlines that utilise a business model that is focused on maximising
operational efficiency through direct flights, high aircraft utilisation and secondary airports so that
they can achieve cost leadership and offer the lowest fares to their customers.
Price Discrimination: a technical economic term that describes situation when firms charge
customers different prices based upon their willingness to pay. An example in the airline industry is
that different prices are paid by economy, business and first class passengers.
Price Elasticity: a measure used to capture the sensitivity of consumer demand for a good or
service in response to changes in the price of that particular good or service.
Return on Invested Capital: the after-tax operating profit, adjusted for operating leases,
expressed as a percentage of invested capital.
Short-Haul Routes: flights that are shorter than 2 hours of flying time.
Single Class Cabin: A form of aircraft configuration whereby there is only one, uniform seat
option available for customers.
Strategic Alliance: a long-term partnership between two or more firms who attempt to improve
their collective competitive advantages by sharing and pooling scarce resources such as brand assets
and market access capability.
Substitute: a product or service that performs the same or similar function through different
means.
Sustainable Competitive Advantage: if a firm is capable of generating profits that exceed the
average profitability within the industry for a prolonged period of time.
Switching Costs: the costs associated with changing from one firm to another.
Turnaround Times: the length of time that it takes for an aircraft to take-off again after landing.
Unbundling: process whereby the airline product offering is stripped down into individual
components. The actual fare paid is for the seat itself, with no extras on-board such as free food,
drinks and newspapers. These extra services are available for an additional fee.
Unitary Board: a type of Board structure whereby the company has only one Board of
Directors, consisting of both executive and non-executive directors and they make decisions as a
Figure 2: Overview of Thesis Structure ............................................................................................................... 6
Figure 3: Literature Review .............................................................................................................................12
Figure 26: Spectrum of Airline Cooperation ....................................................................................................92
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Table 1: Key Differences between LCCs, Legacy Carriers, and Low-Cost Long-Haul ......................................18
Table 2: Fleet of NAS ....................................................................................................................................42
Table 3: NAS Financial Performance (2010-2014) .......................................................................................47
Table 4: Overview of Peer Group .....................................................................................................................49
Table 15: VRIO Analysis for NAS Short-Haul ...........................................................................................86
Table 16: VRIO Analysis for NAS Long-Haul ...........................................................................................88
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Table o f Contents
Executive Summary ............................................................................................................................... i
Acknowledgements ............................................................................................................................... ii
Abbreviations ....................................................................................................................................... iii
Definitions ............................................................................................................................................ iv
List of Tables and Figures .................................................................................................................. vi
The major international airports around the world typically exhibit features consistent with that
of a local monopoly as they face limited competition from secondary airports (IATA, 2011a). Their
source of market power is derived from the finite number of slots available at the key hubs and the
high switching costs associated with changing airports, especially when it is an important link in a
hub-and-spoke network configuration. The magnitude of these switching costs is proportionate with
the size of an airline’s presence at that particular airport. Therefore, legacy airlines which use these
airports as hubs in their network can be considered “captive customers” and are reticent to relocate
(Polk and Bilotkach, 2013).
Labour
The airline industry is labour intensive with numerous employees required for the efficient
functioning of an airline including engineers, pilots, cabin crew, check-in staff and ground personnel.
Labour’s share as a percentage of operating costs varies from less than 15% in the Asia-Pacific to
25% in Europe (IATA, 2010a; p1)
One of the main sources of their power comes from the fact that there are no substitutes for
several classes of employees such as pilots and mechanics (Porter, 2008). Therefore, the threat of a
strike from those employees can effectively ground an airline’s entire operations and provides them
with the bargaining power to capture considerable profit. Based on a study by Hirsch (2007; p2), it
was found that airline employees were paid a 15.4% premium than comparable workers in other
industries, with pilots earning the highest premium of 24.5%.
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Fuel
Fuel represents another input necessary for the operation of commercial aircraft. Since there are
a relatively limited number of companies supplying aviation fuel, they have considerable power to
drive up prices (Marketline, 2014). In 2014, fuel accounted for 29% of operating expenses (IATA,
2014a; p1). Airbus (2014) stated that it is a well-established fact within the industry that forecasting
the oil price is extremely difficult, with most short-term forecasts proving to be wrong. As a result,
airlines aim to mitigate some of the supplier power through the use of complex hedging strategies.
This is especially important in the long-haul market, where fuel represents an even larger component
of operating costs when compared to short-haul operations (Morrell, 2008). Indeed, the collapse of
two low-cost long-haul carriers in 2008, Zoom Airlines and Oasis Airlines, were directly attributable
to the soaring fuel price which compromised their capability to cut costs sufficiently to maintain a
profitable long-haul operation (Gray, 2009; Taylor, 2008). It was also one of the main reasons for Air
Asia X ceasing long-haul operations from Asia to its European destinations (Godvindasamy, 2012).
4.2.4. Bargaining Power o f Buyers
When an industry has powerful consumers, it will drive prices down and squeeze the profitability
away from firms further upstream (Porter, 2008). Within the airline industry, the consumers can be
broken down into two main groups; leisure travellers and business travellers.
Leisure Travellers
Porter (2008) asserted that one way customer groups can derive power is if there are few buyers
in the market and they have the capacity to buy large volumes. That is not the case in the airline
industry as traffic volume surpassed 3.3 billion in 2014 (IATA, 2014a; p1). When viewed in this
context, each individual passenger has no bargaining power whatsoever as the impact of one
passenger switching to another airline is negligible. Instead, their bargaining power is derived from
their high price sensitivity and low switching costs (Marketline, 2014). Air travel is ultimately a
discretionary good for the vast majority of travellers and they can simply opt not to travel if fares are
too high.
The development of the Internet as an important source of information, allowing consumers to
compare prices across a wide range of airlines before deciding to purchase a ticket has increased the
level of price competition within the industry and partially explains the ability of LLCs to gain market
share away from legacy airlines (Marketline, 2014).
Nevertheless, within the leisure market, discrepancies still exist. Older travellers tend to have
higher disposable incomes and higher service expectations while younger travellers tend to view price
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as the most critical factor and are willing to sacrifice traditional services in exchange for low fares
(Oxford Economics, 2010).
Business Travellers
While the number of leisure travellers far exceeds those that travel for corporate purposes,
business travellers represent a disproportionate source of profit for airlines due to their ability and
willingness to pay large premiums for business and first class cabins that provide better quality food
and beverages, flat sleeper beds and more personalised service (CAPA, 2015c).
The purchasing power of business travellers puts them in a strong bargaining position as they
provide airlines with a predictable source of large revenue, as many are locked into long-term
contractual agreements. In order to attract these highly profitable customers, airlines must tailor their
product proposition towards the demands of business travellers, who place much greater emphasis
on punctuality, route frequency, unrestricted fares, seat and cabin comfort, check-in facilities and
FFPs (Israel, 2014b).
4.2.5. Rivalry among Compet i tors
Porter (2008) explained that, in industries with high internal rivalry, it limits the overall
profitability of all firms in that industry. The extent of the effect depends upon the intensity of the
competition and the basis upon which they are competing.
Capacity
Besanko et al. (2013) outlined the relationship between capacity and pricing; at full capacity,
airlines have no incentive to cut prices as they would simply eat into their own profit margin, but
when there is excess capacity, they ought to cut prices as long as they remain above marginal cost.
Therefore, when variable costs are only a smaller proportion of the total cost base, as is the case in
the airline industry, prices can fall very dramatically as competitors seek to protect market share. The
commoditised nature of the product exacerbates the potential for aggressive and ongoing price wars
to the detriment of all competitors (Porter, 2008).
Due to the inefficiencies inherent in the industry and the fact that governments have shown a
disinclination to let airlines fail, capacity is rarely at equilibrium. Other factors contributing to the
constant state of disequilibrium include the fact that reductions can only occur in bulk, as capacity is
reduced by aircraft rather than by seat, the risk of large capital losses if aircraft are sold during
downturns and airport slots are usually agreed for a certain period of time, which creates exit barriers
from routes and has the potential to have ripple-on effect on the economics of the whole network
for hub-and-spoke operators (IATA, 2011a). On the flip side, it is comparatively easy to add capacity
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during periods of high growth due to an active market for used planes and the possibility of entering
into leasing agreements.
High Exit Barriers
The easiest way to remove excess capacity is for poorly performing firms to leave the market.
However, despite the low profitability in the industry, less than 1% of airlines exit the market in any
given year (IATA, 2011a; p34). One of the reasons is the ease with which airlines can maintain
capacity by redeploying assets and resources to different geographic areas in the hopes of gaining
market share.
Another reason is derived from the large capital investments required to enter the industry. After
a firm makes that sort of investment, it is motivated to stay in the market for as long as is rationally
possible. This situation is compounded by the fact that airlines are often committed to scheduled
flights many months in advance as vital inputs such as fuel, crew, gates and airport slots have already
been allocated (Button and Pels, 2010). Therefore, the industry’s low marginal cost structure makes it
feasible for unprofitable airlines to remain in the industry for many years (IATA, 2011a).
In addition, even in the event of bankruptcy, capacity is not automatically reduced as some
countries, such as the U.S., permit bankrupt carriers to continue to operate as a going concern
despite their insolvent state (Wojahn, 2012).
4.2.6. Porter ’s Five Forces Summary
While the threat of substitutes is low, particularly in the long-haul market, low switching costs,
limited incumbency advantages and the diminishing importance of economies of scale mean that
there are relatively few barriers to entry apart from the large initial capital expenditure required. With
both buyers and suppliers exhibiting significant bargaining power along the vertical value chain and
extremely high internal rivalry caused by excess capacity and high exit barriers, it is unsurprising that
the airline industry has the lowest average return on invested capital (“ROIC”) from the list of
selected industries that is included in the analysis by Porter (2008). The average ROIC for airlines
was a mere 6.9% between 1992 and 2006, well below the average industry ROIC of 14.9% and the
top performing sectors, which had an average ROIC above 40%.
However, that is not to say that all airlines suffer from poor profitability as there is a wide
divergence in the operational performance throughout the industry. In a study of the world’s 85
largest airlines, who together accounted for 85% of global passenger traffic, IATA (2006) found that
eight airlines generated operating profits in excess of $500 million while twenty made operating
losses, with nine of those suffering losses of more than $100 million. Although that study did not
find any significant correlation between size and profitability, Pearce (2013; p16) found that the
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ROIC was consistently higher for LCCs than legacy carriers in all regions, with the largest disparity
evident in Europe where the ROIC of LCCs was 7.6% compared to just 3.6% for legacy carriers.
Moreover, it should be recognised that suppliers and other industries involved in the aviation
value chain have been able to generate positive ROIC, sometimes well above industry norms, with
the highest returns been generated by travel agents who have a ROIC of 44% (Pearce, 2013; p19).
Monopoly elements along the value chain have had a distorting effect whereby airlines are in the
unenviable position of generating the lowest returns while assuming a disproportionate amount of
the risk (Button, 2004). This has created the paradoxical situation whereby air transport continues to
generate enormous value for passengers and others along the value chain but simultaneously destroys
value for its investors (Pearce, 2013).
Nevertheless, entrepreneurs are still attracted to the industry because of the potential for large
profits and the industry’s glamorous image. Over the last 40 years, more than 1300 airlines have been
established, only a fraction of whom are still in operation (IATA, 2011a; p2). Figure 8 provides a
graphical look at the impact that the Five Forces have on the profitability of the industry.
Figure 8: Porter ’ s Five Forces Summary
Source: Own Creation
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5. Internal Analys is o f Norwegian Air Shutt l e ASA
In order to conduct the comprehensive strategic analysis intended, we must also include an
internal analysis of NAS to supplement the external analysis in the previous chapter. The resource-
based view of organisational performance is a leading perspective within international business which
hypothesises that the performance of individual firms is primarily driven by the differences in the
resources and capabilities that each firm possesses (Peng, 2010).
As such, this chapter will conduct a thorough analysis of NAS by examining the airline’s history
and corporate governance structure, its financial performance, key operational issues, a SWOT
analysis to determine the company’s major strengths, weaknesses, opportunities and threats, and a
VRIO analysis that assesses the four interconnected factors of value, rarity, imitability and
organisational aspects of NAS’ resources and capabilities to determine if they provide the necessary
platform for the company to build a sustainable advantage both in the short-haul market within
Europe as well as its long-haul operations to North America and Asia (see Figure 9).
By conducting this internal analysis, it will assist us to answer the second research question of
whether NAS possesses the necessary internal resources and capabilities to become a successful
player in the long-haul market, and the ways in which the company has leveraged its key resources
and capabilities to adjust the existing business model to better meet the challenges that it faces in its
long-haul operations.
Figure 9: Internal Analys is
Source: Own Creation
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5.1. Airl ine History / Overview
Founded on the 22nd of January, 1993, NAS has grown rapidly to become the 3rd largest budget
carrier in Europe and the 2nd largest airline in Scandinavia, behind only SAS. Today, NAS employs
4500 employees, operates 424 routes to 130 destinations across four continents and carried over 24
million passengers in 2014. This sections aims to give a brief outline of the company’s history and
how it has managed to achieve its current market position.
Please note that all the information in this section is sourced from NAS’ official website
(www.norwegian.com)
5.1.1. Early Deve lopments
During the formative stages of NAS’ business, it operated in close cooperation with another
LCC, Braathens S.A.F.E. At that time, Braathens was the largest domestic airline in Norway. The
relationship with Braathens lasted until 2002, when SAS purchased Braathens and terminated all
contracts with NAS. Subsequently, NAS became completely independent and began the process of
implementing its low-cost strategy to become a full-fledged competitor to SAS in the Scandinavian
market. The company listed on the Oslo Stock Exchange in 2003 to fund its expansion plans. During
the IPO, over 250 million NOK was raised.
In 2004, NAS entered into a code-sharing agreement with two other small discount carriers in
the Norwegian market, FlyNordic and Sterling to expand NAS’ route network from Norway to the
rest of Europe.
5.1.2. Fleet Expansion
At its inception, NAS operated a small fleet of only three Fokker F-50 aircraft, which had
previously belonged to a subsidiary of Braathens. The company continued to operate with F-50’s
until late 2002, when it purchased seven Boeing 737-300 aircraft. This represented the first step in an
aggressive expansion of its fleet size.
In 2007, NAS reached agreement with Boeing to purchase forty-two 737-800 aircraft. At the
time, it was the largest order ever placed by a Scandinavian airline. The upgrade allowed NAS to
achieve two of its main objectives; becoming more efficient while also being more environmentally
friendly. The 737-800 was expected to reduce emissions and fuel consumption by more than 20%
and increase the passenger capacity from 148 to 189.
NAS laid the foundations for its long-haul expansion by entering into an agreement with Boeing
for the purchase of 3 Dreamliners and the lease of one more in 2011. At the beginning of 2012, NAS
ordered 222 aircraft from both Boeing and Airbus; 100 Boeing 737 MAX8, 22 Boeing 737-800 and
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100 Airbus A320neo. That order set the record for the largest ever single aircraft order by an
European airline.
With an average age of just four years, NAS’ 98-strong fleet is one of the youngest in Europe,
and operates over 600 flights on a daily basis. Table 2 provides an overview of NAS’ existing fleet, its
outstanding orders and the capacity of each type of aircraft.
Table 2: Flee t o f NAS
Type of plane Boeing 737-800
Boeing 737-300 Boeing 787-8 Dreamliner Boeing 737 Max
8 Airbus A320neo
Number 85 5 8 0 0
On Order 44, with option of 6 more 148 9 100, with option
of 100 more 100, with option
of 50 more
Passengers 186/189 148 291 (32 in Premium Economy and 259 in Economy) 186 168
Source: Own creation, based on NAS official website
5.1.3. Route Network Extension
NAS started from humble beginnings as a regional airline providing a limited number of services
to regional destinations along the west coast of Norway. Over time, NAS expanded its network
across Norway, before expanding its network to Sweden and Denmark.
It was during 2006 that the company started to expand beyond Scandinavia. It established a
Polish base and subsidiary that operated flights from Warsaw to five European cities. After acquiring
FlyNordic from Finnair in 2007, Stockholm was established as the company’s Swedish base. NAS
added Rygge and Copenhagen to its collection of bases in Scandinavia and Dubai became the
company’s first destination outside of Europe in 2008.
By 2011, NAS started international flights from Gothenburg in Sweden and opened a new base
in Helsinki. With bases in Sweden, Finland, Denmark and Norway, NAS established itself as a
serious competitor to SAS in the Scandinavian market.
2013 was a landmark year for NAS’ future strategic direction. The company took delivery of its
first three Dreamliners. Five more arrived in 2014. It has nine more Dreamliners on order for its
long-haul operations. With these new long-range aircraft, NAS launched its long-haul routes from its
Scandinavian bases to Fort Lauderdale, New York and Bangkok. Bangkok also became the
company’s first base outside Europe.
In February 2014, NAS was granted an Irish Air Operator’s Certificate for its subsidiary,
Norwegian Air International Ltd. NAS also opened its first bases in the U.S.; in New York and Fort
Lauderdale, and commenced flights from London Gatwick to these U.S. bases. In total, NAS
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currently has 17 operational bases; six in Spain, five in Norway, two in the U.S. and one in the UK,
Sweden, Denmark, Finland and Thailand.
5.1.4. Other Notable Deve lopments
In addition to its core business, NAS has also established other complimentary businesses. Bank
Norwegian provides full scale online banking services while Norwegian Reward provides NAS
customers with a FFP that is not commonly found amongst other LCCs. Both were established
during 2007.
In 2008, a major product innovation in the form of Call Norwegian was introduced. It is a
mobile phone subsidiary which offers in-flight mobile phone and wireless Internet services on NAS
flights. This innovation allowed NAS to become the first European airline to offer high-speed in-
flight Wi-Fi services in 2011. This service still differentiates NAS from most other airlines as
demonstrated by the fact that it has won the Passenger Choice Award for Best In-Flight Connectivity
every year since 2012.
One distinctive feature of NAS planes is their livery of a white exterior with a red nose, along
with portraits of individual Scandinavian heroes on the tail. This practice began with the image of
Norwegian actor, Erik Bye, in 2009 and was subsequently extended to include Swedish and Danish
heroes in 2010. This development reflects the shift from NAS being an exclusively Norwegian
company to one that proudly represents the whole Nordic region.
5.1.5. Prof i tabi l i ty
Given that most airlines struggle to generate sustainable profits, it comes as no surprise that NAS
was mired in losses for many years after its inception. It was not until 2005 that the company
recorded its first profitable year. Between 2007 and 2013, NAS was able to post profits every year,
with a record profit of 446 million NOK after tax in 2009. Due to the large capital expenditure
incurred for the purchase of new aircraft, NAS suffered an annual loss exceeding 1.05 billion NOK
in 2014. The recent financial performance of NAS is discussed in more detail in financial analysis
section below.
5.1.6. Corporate Structure
Norwegian Air Shuttle ASA is the parent company of the Norwegian Group. The Group owns
and operates subsidiaries in Norway, Ireland, Sweden, Denmark, Finland and Singapore. The
operations are divided into a few sub-groups, the main one being commercial airline group (see
Figure 10). The commercial airline activities of NAS are performed by the parent company
Norwegian Air Shuttle ASA and its subsidiaries. Norwegian Long Haul AS is a subsidiary that
operates long-haul flights, Norwegian Air Norway AS is in charge of the operations from the
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Scandinavian bases, and Norwegian Air Shuttle ASA flies from the European bases. The asset
group’s subsidiaries are located in Ireland and they deal with aircraft ownership and lease. NAS also
has a resource group that consists of fully-owned subsidiaries in some countries, which provide
permanent local employment for its pilots. Finally, NAS also has interests in other business areas
through the establishment of subsidiaries involved in the promotion of the NAS brand, Norwegian
Cargo and an interest in Bank Norwegian.
The current structure of NAS is a result of a reorganisation of the company that took place in
2014. According to the company, the main goal of the new structure was to provide a platform for
continued growth and entering new markets, while maintaining the company’s flexibility and
adaptability. A clear separation of its business areas improves the ability of the company to respond
quickly to shifting market dynamics. It also structured the operations, with each separate entity
having its own, clear responsibilities.
Figure 10: NAS Corporate Structure
Source: Own Creation based on NAS’ official website
5.1.7. Ownership Structure
The company has been listed on the Oslo Stock Exchange since December 2003 and currently
has over 35 million shares outstanding, held by almost 8500 institutional and private investors.
Neither the Norwegian government nor NAS hold any shares in the company.
78.5% of shares are held by Norwegian investors with the rest coming from around the world,
largely from the UK, Sweden, Finland and Luxembourg (Figure 11). The company has a highly
diversified ownership structure with the largest shareholder being HBK Invest AS., with 27%, and
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no other shareholder owning more than 7% of shares (Figure 12). Diversification in ownership
mitigates the risk that any one, controlling shareholder will be able to assert undue influence over the
Board or management to make decisions in their personal interest, to the detriment of minority
shareholders (Mallin, 2010).
In addition, NAS has only one class of shares and there are no restrictions on the trading of the
company’s shares. Having homogenous share types means that the interests of all shareholders are
properly aligned and they all have the same power and ability to obtain information (Mallin, 2010).
Figure 11: Share Ownership by Country
Source: Own creation, based on data from NAS Official Website
Figure 12: NAS Shareholder Distr ibut ion
Source: Own Creation, based on data from NAS Official Website
Ownership by country Norway 79,3% United Kingdom 10,9% Luxembourg 2,6% Belgium 1,8% Sweden 1,8% United States 1,5% Denmark 1,3% Switzerland 0,4% Iceland 0,1% France 0,1% Other 0,2%
Major Shareholders HBK Invest AS 25,02%
Folketrygdfondet 6,94%
Skagen Vekst 4,41%
VerdipapirfondetDNB Norge (IV) 4,11% Skagen Kon-‐Tiki 2,98%
Danske Invest Norske 2,53% Others 56,54%
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5.1.8. Board o f Direc tors
The Board of Directors play a critical role in connecting the management at NAS with
shareholders. Its main roles include monitoring management, deciding upon the level of executive
compensation, divided policy and advising on key strategic decisions (Mallin, 2010).
NAS utilises a unitary Board structure, currently comprised of 6 members following the
resignation of Benedicte Fasmer in January, 2015. The Chairman is Bjørn Kise, who has extensive
legal experience and represents NAS’ largest shareholder, HBK Invest. The other five Board
members are independent directors, three of whom are employee representatives. They all possess
extensive knowledge from either the aviation sector or other consumer sectors, have relevant
network connections, and professional experience in the areas of finance, capital markets and
marketing.
The fact that neither the CEO nor any other member of management sits on the Board is
positive as it removes the potential for conflict of interest to arise, and ensures that there is a clear
separation of responsibility between management and the Board (Mallin, 2010).
5.1.9. Awards
As a result of the company’s strong corporate governance, innovative products and commitment
to high levels of service, NAS has been bestowed with many internationally recognised awards in the
last five years. In 2009, the company received the Market Leadership Award from Air Transport
World, which is given to airlines that “have developed or entered new markets and/or innovative
business strategies that have grown their networks, revenues, customer base and/or brand
recognition” (ATW Online, 2015).
In addition, SkyTrax named NAS as the “Best European Low-Cost Carrier” in 2013, an
achievement that it repeated a year later. The company won a host of other prestigious international
awards in 2014 including Best Airline in Europe from Passenger Choice Awards, Europe’s Best Low-
Cost Airline from Airlineratings.com, and Best Low-Cost Airline in the World from Air Transport
News. These awards vindicate the company’s strong operational and financial performance and
provide NAS with a good platform for continued growth as it expands its services beyond Europe.
5.1.10. Summary
This section has highlighted the company’s rapid expansion from its humble beginnings in 1993.
It has gradually increased the size of its route network over time, placed the largest aircraft order in
European history, established a long-haul subsidiary in Ireland, grown the scope of its business
operations and has consistently generated profits well above industry norms in the last decade. NAS
provides an excellent model for how to build a successful LCC in today’s aviation market. The
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company’s strategic vision, strong corporate governance and innovative capacity have been
recognised by the various awards that it has received in recent years. Figure 13 summarises the major
developments in NAS’ history in the form of a timeline.
Figure 13: Timel ine o f Major Deve lopments in History o f NAS
Source: Own Creation, based upon information from NAS official website
5.2. Financial Analys is
In this section, NAS’ financial and operational performance over the last 5 years will be carefully
examined. An analysis of the key figures of NAS’ balance sheets will be conducted in order to obtain
a full picture of the company’s financial performance during this period. In addition, NAS’ key
financial ratios and metrics will be calculated and then benchmarked against a peer group of rival
airlines. The peer comparison will provide us with a better understanding of how NAS is performing
when compared to some of its main competitors.
5.2.1. Financial per formance
Table 3 provides an overview of NAS’ financial performance in recent years. It shows that NAS
has been able to increase passenger numbers and operating revenues every year since 2010. This has
coincided with the company’s expansion of its route network and fleet size, which resulted in a
significant growth in capacity.
Table 3: NAS Financial Per formance (2010-2014)
1993 Norwegian Air Shuble ASA established
2003 Listed on Oslo Stock Exchange
2005 First profitable year
2006 Established first non-‐Scandinavian base in Poland
2007 Bank Norwegian and Norwegian Reward established
2008 Dubai became first des=na=on ou=sde of Europe
2009 Record profit of 446 million NOK
2011 In-‐Flight Wifi Introduced
2012 Largest aircra9 order by European airline
2013 Commencement of long-‐haul opera=ons; Norwegian Cargo established
2014 4500 employees, 424 routes, 130 des=na=ons, 24 million passengers
Source: Own creation, based upon data from NAS Annual Reports 2010-2014
Despite the sustained growth in revenues, the company has seen its net profit fluctuate during
this period, culminating in a loss of €126 million in 2014. The trend started in 2013 when NAS’
profits decreased by 33%. The main reasons behind it were rapid capacity expansion, launch of the
long-haul routes, delays in the delivery of the new Boeing Dreamliners, and reliability issues when the
Dreamliners were finally delivered, all of which led to a sharp increase in operational expenses in
2014, as depicted in Figure 14. These operational issues were exacerbated by a large depreciation of
the NOK in the fourth quarter of 2014 and a loss of 500 million NOK resulting from its fuel
hedging strategies.
Figure 14: Summary o f Operat ing Revenues and Expenses (2010-2014)
Source: Own Creation, based on data from Norwegian Annual Reports 2010-14
Therefore, while the company’s performance in the five years has been impressive, 2014 marked
the first year that NAS has suffered an operating loss since 2005. This is a result that the company is
keen to avoid in 2015, and an improvement in the performance of long-haul operations will go a
long way towards achieving this goal.
5.2.2. Peer Group
900
1100
1300
1500
1700
1900
2100
2300
2500
2700
2010 2011 2012 2013 2014
Opera=ng Revenue
Total opera=ng expenses
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In order to analyse the performance of NAS, we have chosen a peer group that consists of
comparable airlines. In the following section, we are going to benchmark their performance metrics
with those achieved by NAS. In the process of choosing these airlines, we tried to find companies
whose business models are most similar to that of NAS. All of the airlines chosen have traits
prevalent in the low-cost strategy. With the exception of Air Berlin, the airlines in the peer group are
independent entities, unaffiliated with any of the legacy airlines. However, there are some differences
in the geographic area of the destinations served as well as lengths of the flight connections.
NAS’ route strategy can be described as “hybrid” in the sense that the company operates short,
medium and long-haul flights. It is an European airline whose main market remains Scandinavia. As
such, a similar company is Air Berlin, which is also a “hybrid” airline focused mainly on European
market while also serving long-haul destinations in North America, Asia and Africa. Another
interesting example is Air Asia X, which is a LCC that provides medium and long-haul flights in the
Asia-Pacific. Air Asia X is a particularly interesting company from the perspective of NAS, as it
operated long-haul routes to Paris and London from Kuala Lumpur between 2009 and 2012, before
making the decision to discontinue those services due to a range of operational factors such as high
fuel costs, high taxes and weak demand due to the after effects of the Global Financial Crisis (Yahoo,
2012). Finally, Ryanair and EasyJet are chosen because they are the two largest LCCs in the
European market, directly competing with NAS on many short-haul routes.
Since the main focus of this thesis is on the viability of the low-cost model in the long-haul
market, we believe that establishing a peer group consisting of LCCs with different route strategies is
the most accurate way to picture the differences coming from these strategies. A quick overview of
the peer group is shown in Table 4.
Table 4: Overview of Peer Group
Factor Ryanair EasyJet Air Berlin Air Asia X Home Country Ireland The UK Germany Malaysia
Founded 1985 1995 1978 2007 Route Structure Short-haul Short- to medium- haul Short-, medium- and long-
haul Medium- and
long-haul Pricing Strategy Lowest fares on
every route Value-for-money, not
necessarily the lowest fares Value-for-money, not
necessarily the lowest fares Lowest fares
on every route Network Strategy Rapid network
expansion Network density Network density Rapid network
expansion Strategic Alliance Independent Independent OneWorld Independent Passengers (2014) 81 million 64.8 million 31.7 million 4 million 2014 Profit before
tax (million) €591.4 €720.5 - €376.7 - €139
Source: Own Creation, using information from airline websites and annual reports
Since the airlines chosen for the comparison group are registered in different countries, their
financial data is denominated in different currencies; Euros for Ryanair and Air Berlin, Malaysian
50 |
Ringgit for Air Asia X, British Pounds for EasyJet and NOK for NAS. In order to provide a clear
picture of their performance, we decided to express all the figures in a common currency – Euros.
The conversion rates are shown in Table 5; using the yearly average exchange rates.
Table 5: Fore ign Exchange Convers ion Rates (2010-2014)
July 713.7 836.9 793 10% / -5.5% 478 (Aeroflot; stopover in Moscow)
-49.3% / -75%
August 546.2 669.4 592 7.7% / -13.1% 415 (Qatar Airways; stopover in Doha)
-31.6% / -61.3%
September 376.2 499.4 543 30.7% / 8% 382 (Cathay Pacific; stopover in Hong Kong)
1.5% / -30.7%
October 400.9 524.1 658 39.1% / 20.3% 416 (Qatar Airways; stopover in Doha)
3.6% / -26%
November 376.2 499.4 655 42.6% / 23.8% 415 (Qatar Airways; stopover in Doha)
9.3% / -20.3%
Source: Own Creation, based on prices on airline websites (all prices are in €)
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Table 11: London – New York Price Comparison
Month NAS Base Fare
NAS LowFare+
BA Economy
NAS Price Advantage
Base/LowFare+
Lowest Rival Airline NAS Price Advantage
Base/LowFare+ June 620.5 748.5 595 -4.3% / -25.8% 532 (Iberia; Stopover in
Madrid) -16.6% / -40.7%
July 879.3 1007.3 1421 38% / 29% 667 (Ukraine International; stopover in
Kiev)
-31.8% / -51%
August 731.5 859.5 1421 48.5% / 39.5% 558 (United; stopover in Dubai)
-31% / -54%
September 509.7 637.7 607 16% /-5% 506 (Ukraine International; stopover in
Kiev)
-1% / -26%
October 472.2 600.7 607 22.2% / 1% 492 (Ukraine International; stopover in
Kiev)
4% / -22%
November 472.8 600.8 530 10.8% / -13.4% 477 (United; stopover in Dubai)
1% / -26%
Source: Own Creation, based on prices on airline websites (all prices are in €)
Table 12: Oslo – New York Price Comparison
Month NAS Base Fare
NAS LowFare+
SAS Economy
NAS Price Advantage
Base/LowFare+
Lowest Rival Airline NAS Price Advantage
Base/LowFare+ June 479.6 578.2 559.9 14.3% / -3.3% 448 (Swiss; stopover in
Zurich) -7% / -29%
July 701.3 799.9 913.9 23.3% / 12.5% 722 (British Airways; stopover in London)
2.9% / -10.8%
August 537.6 636.2 559.9 4% / -13.6% 389 (American Airlines; stopover in London)
-38% / -63.5%
September 403.9 502.5 559.9 27.9% / 10.3% 354 (Finnair; stopover in Helsinki)
-14% / -41.9%
October 354.6 453.2 559.9 36.7% / 19% 305 (Finnair; stopover in Helsinki)
-16.3% / -48.6%
November 280.8 379.4 536.58 47.7% / 29.3% 258 (Air Canada; 2 stopovers in Frankfurt
and Toronto)
-8.8% / -47%
Source: Own Creation, based on prices on airline websites (all prices are in €)
Main Competitor
Based on the data, it seems that NAS’ base fare is consistently lower than the fares offered by its
major rival on each of the three routes. With the exception of June on the London-New York route,
NAS’ base fares were between 4% and 48.5% cheaper than the fares offered by Thai Airways, BA
and SAS.
However, this price advantage is eroded if customers choose the LowFare+ product, which
includes seat reservation, 20kg of checked luggage and meals on-board. In eight out of the eighteen
months in the sample, the fares offered by NAS were higher than its major competitor with a
maximum price disadvantage of almost 26% on the London-New York route in June. Given that the
LCC model has not been widely accepted on long-haul routes and legacy airlines continue to provide
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a full range of services on these routes, it is arguable that the LowFare+ product is the most
comparable fare structure. That being the case, it shows that NAS has actually failed to establish a
price advantage on the many of the routes that it is currently offering.
Lowest Priced Rivals
The results are even bleaker when we take indirect flights into account. When compared to the
lowest priced rival, NAS is able to achieve a price advantage in less than half of the sample months,
with a maximum price advantage of less than 10%. Even when looking at the base fare, NAS
suffered from significant price disadvantage in many of the sample months, with the worst
performance along the Oslo-Bangkok route, where the price disadvantage approaches 50% in both
June and July.
Given the poor performance of the base fare, it is unsurprising that the results are disheartening
when we examine the LowFare+ product. In this case, NAS suffers from a price disadvantage in
every single month in the sample, ranging from 10.8% to 79%.
Time of Booking
The results also show that NAS’s prices between September and November are much more
competitive than they are in June, July and August. There could be two possible explanations for this
outcome. Firstly, the summer months are when demand is highest. As a result, the cheapest fares are
sold well in advance and the fares that we observed on May 25 were the more expensive ones that
remain for passengers booking closer to the date of departure. Secondly, it is also possible that NAS
is simply trying to capitalise on the strong demand during the summer months by charging high fares
in order to maximise revenue, safe in the knowledge that it will be able to preserve high load factors
in spite of the high prices. Given that Sturreson (2010) identified that LCCs tend to adopt a
simplified approach to revenue management whereby fares are priced solely upon the time of travel,
whether it is peak or off-peak, and how far in advance the ticket is purchased, both of the above
explanations may be reasonable in providing an insight as to the reasons behind NAS’ price
competitiveness, or lack thereof, on its long-haul routes.
5.3.10. Summary o f Key Operat ional Issues
This section has provided an overview of how NAS has adapted various elements of its short-
haul operations to maximise the chances of success in the long-haul market, which is highly
competitive and dominated by legacy carriers. Table 13 compares the key differences between NAS’
short-haul and long-haul operations with regards to the main operational issues raised in this section.
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Table 13: Key Dif f erences between NAS Short-Haul and Long-Haul
Operational Issue NAS Short-Haul NAS Long-Haul Strategy Cabin Configuration Economy Class Cabin only Utilises a Premium Class Cabin, but falls short of
business class offering Airport Location Primary airports in Scandinavian capitals
along with secondary and regional airports in other parts of the route network
Primary airports in Scandinavian capitals plus London Gatwick
Turnaround Times & Aircraft Utilisation
Turnaround times as little as 30 minutes and aircraft utilisation of between 10 and 12
hours daily
Objective to have 90 minute turnarounds and aircraft utilisation of up to 18hrs per day by using
same aircraft across Atlantic then to Asia Route Structure Point-to-point network almost exclusively
serviced by Boeing 737-800 Point-to-point with no onward interlining or
baggage transfer. Serviced by Dreamliner Product Package Unbundled; customers pay for seat with
additional services available for a fee Unbundled, but in-flight entertainment is included
Cargo Services None or limited to small parcels so that it does not affect turnaround times
Established Norwegian Cargo to handle cargo services
Stimulation of Demand
Generated leisure demand to holiday destinations especially to its Spanish bases in
Mallorca and Canary Islands
Opportunity to target leisure travellers and VFR segment as there is a shortage of direct connections
from Scandinavia to popular destinations in the U.S. and Bangkok
Prices 13th lowest among LCC peers in Europe Base fares are, on average, lower than rivals offering direct services. However, for the LowFare+
product and when indirect flights are included, NAS suffers from price disadvantages
Source: Own Creation
The key changes include the fact that NAS has introduced a Premium Class cabin on the long-
haul routes that competes effectively on price with the Premium Economy services of rival airlines,
established Norwegian Cargo to capitalise on the large payload capacities of the Dreamliner, and the
introduction of in-flight entertainment to appease customers who demand more amenities on longer
flights. Moreover, NAS aims to gain a competitive advantage over rivals on the long-haul routes by
increasing aircraft utilisation to around 18 hours per day by using the same aircraft for flights from
the U.S. to Europe and then onwards to Bangkok. This reduces costs associated with overnight
accommodation for the crew and idle aircraft.
Despite these changes, NAS has also stuck to some of its core principles such as a point-to-point
network structure, with no interlining agreements or onward transfer services for its passengers. The
key reason is that there are significant costs associated with such arrangements and NAS, at this early
point of its international expansion, lacks the resources to provide such services independently.
Given that there are very few cities in Europe with the necessary traffic flow to sustain point-to-
point services, NAS has made a smart strategic decision in establishing Gatwick as a key base, in
addition to the primary airports in Oslo, Copenhagen and Stockholm. The latter three are currently
underserved by existing legacy carriers in terms of direct flights to the U.S. and Asia. Finally, NAS
still offers an unbundled product, whereby passengers are required to pay extra for additional
services such as seat allocation, checked baggage and on-board meals. This is one of the core points
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of differentiation between legacy carriers and LCCs that NAS has been keen to maintain and places
the onus upon passengers to choose whether or not they want to have these services provided.
The results of the price comparison show that, if air travellers are willing to cope with the
inconvenience associated with flight transfers and longer travel times, they are still able to obtain
much lower fares flying with existing airlines when compared to the fares offered by NAS. These
results reinforce the established wisdom that a hub-and-spoke system is the most effect system for
long-haul routes as legacy airlines with a dominant presence at hub airports can channel traffic from
their many short-haul spokes to their hub in another country, which is also connected to many cities
(Gillen and Morrison, 2005). Therefore, high frequencies can be developed on the spoke routes to
feed passengers into hubs for onward connection, thus creating the possibility for higher long-haul
route densities, high load factors, lower average costs and consequently, lower fares. Since this model
is aimed at maximising yield throughout the entire network, it is better tailored to long-haul routes as
a much greater percentage of passengers require connection at one or both ends of their journey, as
compared to short-haul routes, where passengers can generally find a point-to-point flight to their
final destination.
In addition, the results of the premium class comparison confirmed the widespread belief of the
previous literature as it showed that BA and Delta were able to charge return fares in excess of €8200
for their business class cabin on some routes and as a result, the substantial margins from these high-
yielding customers allow these airlines to subsidise economy class seats and maximise load factors.
This is a primary reason why NAS has, thus far, failed to achieve a price advantage in the long-haul
market.
The strategic implication is that NAS is best positioned to compete with legacy airlines currently
offering direct services along the routes served by NAS, primarily on its base fares. If passengers
look beyond the base fare, they will realise that the product package offered by NAS is inferior to
those of legacy airlines and come to the realisation that they are better off remaining loyal to existing
carriers. Therefore, NAS should seek to appeal to leisure travellers with the highest levels of price
sensitivity, such as backpackers and students, who travel light, prefer direct connections and are
willing to forego all amenities in order to obtain the lowest possible fares.
5.4. SWOT Analys is
Peng (2010) stated that the SWOT analysis is one of the leading tools available in global business
allowing firms to ascertain their critical strengths, weaknesses, opportunities and threats. Through
this analysis, it should enhance our understanding of how NAS will be able to exploit its core
strengths to take advantage of the opportunities inherent in an inefficient market while minimising
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the impact of the firm’s weaknesses so that it can mitigate the risk factors that are always prevalent in
such a dynamic industry.
5.4.1. Strengths
Strong leadership
In her analysis of the success behind Southwest Airlines, Gittell (2005) outlined the strong
leadership of Herb Kelleher as a key contributing factor as it allowed the company to create shared
goals, facilitate knowledge transfer throughout the organisation and to foster mutual respect between
the top levels of management with lower level employees. When employees are properly rewarded
and feel empowered in their job, it will lead to improvements in employee satisfaction and
productivity (Heskett et al., 2008). This also has a flow-on effect on the ability of the firm to
maximise customer satisfaction, loyalty and ultimately, revenue growth and firm profitability.
In Bjørn Kjos, NAS has a charismatic CEO who is fully invested in the success of the company,
having been one of the founding partners in 1993. His previous experience includes six years as a
fighter pilot in the Norwegian Air Force as well as twenty years as a legal practitioner (Marketline,
2015). Therefore, not only does he have the requisite qualifications to be an effective CEO, but he is
also highly respected within the industry and amongst NAS employees. Under his watch, NAS has
grown into the successful airline that it is today. His achievements at the helm of NAS were officially
recognised in 2009 when he won the Ernst & Young Entrepreneur of the Year (Boarding, 2009) and
Manpower’s Leader of the Year award (Sletten, 2009).
Customer Service
NAS’ focus on providing the highest level of customer service is institutionalised through its
vision statement: “Everyone should afford to fly.” Its objective is to provide opportunities for
everyone to travel by air through the provision of low fares, a high-quality travel experience, and
helpful and friendly service. In 2012, NAS was formally recognised when it received the award for
Highest Customer Satisfaction from the Swedish Quality Index. Given that the airline industry is
consistently amongst the worst performing industries in terms of generating customer satisfaction
(Peterson, 2010), this is a source of significant competitive advantage for NAS moving forward.
Strong Position in Scandinavia and Internationally
NAS is a market leader within the Norwegian domestic market. It has an extensive network of
routes within Scandinavia and offers a high frequency of flights between the major cities. In 2014, its
share of capacity in the Scandinavian market was around 23% (SAS, 2014). Unlike many of its
competitors, the company is still experiencing strong growth in routes, revenue and market share,
NAS added 81 new routes during 2013, operating revenues grew by 20% and passenger growth was
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almost 17% (Norwegian Annual Report, 2013). Today, NAS is the third largest discount carrier in
Europe and the seventh largest in the world.
Modern fleet
As a relatively new entrant in the aviation market, NAS possesses one of the youngest fleets in
Europe. This provides it with a significant advantage over legacy carriers operating with older
generation aircraft because the Boeing 737-800 and the Dreamliner, which make up the majority of
the fleet, have larger cabin capacities and are more fuel efficient (Norwegian, 2012).
The modern fleet also allows NAS to operate each of its jets for longer duration than its rivals, so
it needs fewer of them than a carrier trying to serve the same routes with older planes. Finally, there
are also cost savings in terms of lower maintenance and fuel costs.
In addition, NAS’ fleet is quite uniform as it has only three models of aircraft in its operations,
with around 90% of the total fleet being the Boeing 737-800. The homogeneity of the fleet is capable
of producing cost savings resulting from economics of aircraft utilisation and maintenance, thus
allowing the airline to yield higher operating margins (Zuidberg, 2014; Brüggen and Klose, 2010).
Strong Financial Position
NAS generated positive profits every year between 2007 and 2013. As a result, the company has
a relatively clean balance sheet along with strong positive cash flows. Its financial position is
enhanced by its 20% ownership stake in Bank Norwegian, which generated a profit of 314 million
NOK in 2014 (Bank Norwegian, 2014).
As a Norwegian company, NAS is able to gain access to export credits offered by the Ministry of
Trade and Industry. This program provides stable long-term financing at low interest rates
(Nortrade, 2015).
The company has been able to leverage these financial advantages to expand its fleet size. Of the
44 direct-buy aircraft which were delivered from Boeing in 2013, NAS was able to finance 31 of
them with predominantly export credits, equity raisings and retained earnings from the previous
years (Marketline, 2015). The other 13 were purchased as part of a sale-and-leaseback agreement.
The fact that the company occupies a strong financial position helps it to overcome the issues
related to undercapitalisation that contributed to the collapse of other LCC long-haul operators such
as SkyTrain and Zoom Airlines (Noakes, 2014).
Unblemished Safety Record
When viewed objectively, air travel is the safest mode of transportation. With a total of just 12
fatal accidents out of 38 million flights, 2014 was the safest year in aviation history (IATA, 2015).
However a number of high profile incidents such as the disappearance of Malaysian Airlines flight
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MH370, the crash of Air Asia flight QZ8501 en route from Indonesia to Singapore and more
recently, the pilot-initiated crash of Germanwings flight 9525 in the French Alps have heightened
awareness of flight safety. The industry as a whole is examining the technology currently being used
on flights in order to more accurately track aircraft in the air and to improve passenger safety.
In light of these recent events, NAS can point to the fact that it has been running a safe
operation since its incorporation in 1993 and has not been involved in any fatal incidents through the
operation of any of its aircraft.
Innovative Capabilities
One of NAS’ key innovations has been the development of in-flight Wi-Fi, which allows its
customers to remain connected for the duration of the trip. About 80% of flights along NAS’
European, North African and Middle Eastern routes are now equipped with this service (Marketline,
2015).
In 2014, NAS was given the Best Single Achievement Award for its moving map on 787
Dreamliners by Passenger Choice Awards. While this feature does not provide the company with any
direct source of revenue, it does nevertheless demonstrate its capacity to constantly innovate new
products and services for the benefit of its customers.
Cost Leadership
Norwegian Annual Report (2013) stated that, even though the company has an average salary
level twice that of its Europeans rivals, it has been able to take second place in terms of cost
efficiency at primary European airports through a combination of efficient operations, lean
management structure, focus on online distribution and a state-of-the-art aircraft fleet.
When we analysed the cost base of NAS and four of its peers in section 5.2.4., we found that it
has a higher CASK than Ryanair but lower CASK than both EasyJet and Air Berlin in the European
market. This reinforces the fact that NAS compares very favourably when it comes to cost efficiency.
Competitive Low Fares
It follows that NAS’ low cost base allows it to offer competitive low fares to its customers. In a
study conducted by Which Airline (2015), they found that NAS charged an average price per route of
€104.02, which placed it in 13th position out of all European airlines. It was able to maintain the same
position when the same analysis was conducted to include 20kg of checked baggage.
In the long-haul price comparison that we conducted in section 5.3.9., we found that NAS’ base
fare is almost always cheaper than its biggest rival on each of its long-haul routes. Even when
compared with airlines offering indirect services, the base fare was very competitive if customers
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were willing to book several months ahead of their travel date in order to take advantage of the
lowest priced fares on offer.
Point-to-Point Services
NAS operates a point-to-point network structure. This strategy enables the company to achieve
better asset utilization and more reliable on-time performance (Ball, 2007). It is also preferred by
passengers because it minimises connections and travel time by bypassing layovers at major hubs.
Specifically in the long-haul market, the routes from Scandinavia to the U.S. and Asia are
underserved by existing airlines. As such, this presents NAS with an opportunity to satisfy the
demand by travellers in the region for affordable, direct services to popular leisure destinations in
Asia and North America.
Frequent Flyer Program
While most other LCC have shied away from offering FFPs for fear that it would be too costly
to administer, NAS has been offering its customers with a FFP since 2007. Customers are able to
accrue CashPoints on flights, hotels and rental cards, which they can subsequently use on future
flights. This provides a point of differentiation for NAS against its low-cost peers as the program can
generate increased customer loyalty and provide NAS with valuable information about the
preferences of its customers so that the company is better positioned to provide services that are
better tailored to the specific demographics of its customer base.
Brand Name & Recognition
Wielgoss et al. (2013) stated a strong brand could be an important facilitator of growth and
financial success as it can foster customer loyalty and drive sales. NAS has established itself as a
market leader within Scandinavia and one of the largest LCCs in Europe. NAS is committed to
continuing to build its brand name, which is why it established the subsidiary, Norwegian Brand Ltd,
in 2013. The stated objective is to maximise NAS’ brand and marketing activities.
5.4.2. Weaknesses
Not a member of any airline alliance
Although many large legacy carriers have embraced the potential benefits associated with
strategic alliances, NAS made a conscious decision to expand its network organically rather than to
enter into one of the large global alliances. In this context, Porter (1996) stated that strategic alliances
within the airline industry provided a poor substitute for innovation and allowed airlines to purport
that they operate a larger network than they actually do. With the benefit of hindsight, it is clear that
this strategy has proven relatively successful in NAS’ short-haul operations as it has been able to
73 |
successfully expand and set up bases throughout its European network. Something the company
would not have been able to do if it was affiliated to an alliance (Sandstrom, 2013).
However, this strategy may prove to be a liability as it enters the long-haul market. Without an
alliance partner, NAS can only offer a very limited range of destinations at relatively low frequencies.
Currently, it offers services to Bangkok and five destinations in the U.S. If it wants to become a
significant player in the long-haul market, NAS will need to increase the number of destinations that
it serves because consumers demand network scope and depth (Pearce and Doernhoefer, 2011). This
is something that is simply impossible for any single airline to provide on long-haul routes,
particularly one that is relatively small like NAS.
One of the key strategic benefits of alliances stems from its ability to help airlines overcome the
regulatory restraints, such as cabotage and cross-border merger prohibitions that are still prevalent in
much of international aviation (Pearce and Doernhoefer, 2011). Even at this early stage of NAS’
long-haul expansion, the company has experienced difficulties in gaining an U.S. air carrier permit for
Norwegian Air International (Wall and Cameron, 2014). For this reason, Bjørn Kjos has hinted at the
possibility that NAS would be willing to cooperate with other LCCs in the U.S. in order to increase
its market penetration and avoid these legal issues in the future (Sandstrom, 2013).
Lack of geographic diversification
In spite of its recent expansion into the long-haul market, NAS’ route network lacks geographic
diversification. It derives almost all of its revenues from the European market. This can be
contrasted with a truly global airline such as Emirates, which in 2012, generated 29% of its revenues
from Australia and the Far East, 28% from Europe, and around 10% each from the Middle East,
Africa, America and West Asia (Wielgoss et al., 2013).
As a consequence, NAS’ future survival is highly contingent upon the maintenance of political
and economic stability within the Euro-zone, which is not a guarantee given the perilous fiscal
positions of important member countries such as Greece, Spain and Italy.
Seasonality
All firms in the airline industry are subject to seasonal variations in income as leisure travellers
tend to plan their travel for certain peak times of the year. In NAS’ case, January and February are
generally months with low levels of demands, which had a negative impact on the airline’s revenues.
This is reflected in the 2013 Annual Report, where passenger numbers were 3.9 million in the first
quarter compared to 6 million in the third quarter. Aircraft utilisation was also lower, at 10.6 hours
per day as compared to 12.2 hours.
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The seasonal effects on income are compounded for NAS due to its lack of geographic diversity.
For airlines such as Emirates and Cathay Pacific, they are able to maintain high load factors and
aircraft utilisation all year round by re-deploying resources to other routes throughout their extensive
networks.
Insufficient Scale
Currently, NAS has less than ten Dreamliners in operation. While the company realises that it
needs more aircraft in order to achieve good profitability in its long-haul operations, the reality is that
there is a high demand for the newest fleet of the Airbus A380 and Boeing Dreamliners from other
airlines and there is a long lead time before new aircraft can be delivered (Sandstrom, 2013). In the
short-run, the lack of scale severely constrains NAS’ ability to grow its long-haul operations beyond
the destinations that it is currently servicing and to achieve significant market penetration.
Unreliable aircraft
The introduction of the Dreamliner provided the company with more problems than it could
possibly have expected. Not only were the first two aircraft delivered several months late, thereby
delaying the commencement of NAS’ long-haul operations, but when they finally did arrive, the
planes lacked the requisite level of dispatch reliability in their first months of operation. More often
than not, they were grounded and passengers were forced to fly on replacement aircraft. On one
flight from Orlando to Oslo, the delay exceeded 44 hours (Milne, 2014). The unreliability of the
aircraft became so problematic that NAS was forced to take the drastic action of de-commissioning
one of the two Dreamliners that it had in its fleet (Koranyi, 2013).
Although these issues were beyond the company’s control, and affected other airlines using the
Dreamliner, it was very costly both in monetary terms as well as the adverse impact it had on
consumer satisfaction and the company’s reputation as it sought to build a positive brand image to a
new customer base.
Litigation and Industrial Disputes
In 2014, NAS even faced a lawsuit in Sweden as a result of delays caused by the Dreamliner, with
total claims exceeding $28 million (Zander, 2014a).
Another issue that is a relevant source of disadvantage for NAS is the labour dispute that it has
been engaged in with various unions. The dispute with the pilots union has been particularly fierce
and forced the company to cancel all Scandinavian flights for a week in March, 2014 before an
agreement could finally be reached (Zander, 2014b). In 2015, 700 Scandinavian pilots held an 11-day
strike, and affected the travel plans of over 200,000 passengers (Koranyi and Neely, 2015).
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Labour disputes are an ever-present risk as the industry remains one of the most unionised in the
world with 60% of non-managerial employees in the major airlines being represented by a labour
union (Gittell et al., 2004). To overcome this, Ryanair has adopted the drastic measure of
unequivocally refusing to negotiate with labour unions. Ryanair’s hard-line stance was confirmed
when it sacked a pilot for simply handing out a membership form for a union (Penman, 2011).
5.4.3. Opportunit i es
Demand Growth in Passenger Numbers
Even though the volume of passengers has increased tenfold in the last four decades, three times
higher than the rate of world economic growth, there is still huge untapped potential in the civil
aviation market (IATA, 2011a; p4). Based on Boeing’s Market Outlook for 2014-2033, the projected
world GDP growth was 3.2% but for airline traffic was forecast to increase by 5% (Boeing, 2015;
p2). This is consistent with historical trends where by growth in air traffic has been a multiple of
GDP growth, reflecting the high income elasticity of demand.
Of particular interest to NAS should be the fact that air traffic in the Asia-Pacific, Latin America
and the Middle East are all projected to increase by 6% annually (Boeing, 2015; p2). As such, NAS
should focus its strategy on the provision of air transport services connecting the growing megacities
and populations of those emerging regions as rising incomes will make air travel more affordable to
people from a wider range of social, geographic and economic backgrounds (Peterson, 2010). Over
time, the division of worldwide traffic will continue to become more evenly distributed as the
economic centre of gravity shifts further East and South (Airbus, 2014).
This growth opportunity is further reinforced by the fact that, in ASEAN countries, there were
only 775 airlines seats available per 100 head of population in 2013 (Rowland et al., 2014, p3). This
was more than four times lower than the U.S., where the figure stood at 3200 seats per 1000 people.
Therefore, it is likely that the major source of growth in the future will come from developing
countries in Asia and Latin America rather than from the developed regions in Europe and North
America. As Noakes (2014) stated, these developing regions possess massive populations with
growing affluence and few preconceptions about what air travel ought to be like provide very willing
recipients of the LCC business model.
Further Deregulation
Despite the liberalisation of air travel in the last 40 years, international flights are still governed
mostly by a complex web of bilateral air service agreements. In 2013, there were over 2500 bilateral
air service agreements (Airbus, 2014; p40). Europe still remains the only region that operates a single
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aviation market, though the 10 countries that comprise the ASEAN region have set 2015 as the
deadline for the establishment of their single aviation market project (Airline Leader, 2014).
For NAS, the progress of the ASEAN single aviation market will be one worth watching.
Currently, it is required to enter into bilateral agreements to fly to most Asian cities from Norway or
the EU. Bjørn Kjos has publicly expressed that he is confident that there will be an Open Skies
agreement between Asia and Europe in the future to form an extended single aviation market
(Sandstrom, 2013). If that prediction comes to fruition, NAS will be perfectly positioned to take
advantage of the strategic opportunities presented. As regulatory restrictions continue to be
removed, it will act as a catalyst for global air travel expansion.
Improved Infrastructure
Airbus (2014) asserted that the lack of necessary airport infrastructure has thwarted passengers
from being able to realise the full benefits resulting from the growth in commercial aviation. There
are palpable differences in terms of access to airports in different regions of the world. In North
America, there are 2.53 airports per million inhabitants. In India and China, that number falls to 0.08
and 0.13 respectively (Airbus, 2014; p43). Therefore, it is imperative that governments in emerging
economies continue to invest in the development of airport infrastructure to ensure that traffic
growth can be accommodated in a sustainable manner.
For example, in China, this is a matter of priority for the government, which has set the
ambitious target of building 70 new airports by 2020 (Chen et al., 2013). In other parts of Northeast
Asia, major airport modernisation projects are also underway. Haneda Airport in Tokyo was recently
upgraded to support the expansion of international operations and Seoul’s Incheon Airport is
undergoing a redesign with the purpose of turning it into a major international hub capable of
serving the whole Asia-Pacific region (Boeing, 2015). In 2013, Dubai opened the Al Maktoum
Airport. When fully operational, it will be the world’s busiest airport, capable of handling 160 million
passengers annually (AirGuide, 2013). Overall, CAPA (2015d) estimated that there are over 2300
airport construction projects at various stages of completion worldwide, where the size of the
investment varies from $1 billion to $20 billion.
Sustained Network Expansion
The route network of the world’s airlines is constantly in a state of flux as they seek to optimise
their network and compete in such a dynamic, but low-profit industry. Important factors in the
development of a route network include liberalisation, level of competition, technological
developments, tourism trends and government policy (Airbus, 2014). Airline route networks have
been expanding rapidly in recent years to keep up with the growing demand by passengers for air
travel.
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One of the key opportunities that NAS is seeking to tap into is the strong demand for low-cost
services that link Europe with North America and Southeast Asia. This is highlighted by the fact that
average load factor of NAS’ long-haul operations was above 90% in 2013 (Norwegian Annual
Report, 2013).
With suggestions that the UK and European markets for LCCs may be reaching saturation point
(Tafur et al., 2008; Dennis, 2004a; Wit and Zuidberg, 2012), it is an opportune time for NAS to focus
on intercontinental expansion. One of the factors working in its favour is that Europe is located at a
key, strategic location in the global aviation network. At present, nearly 50% of all long-haul flights
connect through Europe (Airbus, 2014; p109). NAS currently services six long-haul destinations in
the U.S. and Thailand. This is an insignificant number when compared to the 130 destinations that
exist throughout NAS’ entire network. Therefore, the continued expansion of NAS’ operations into
the long-haul market will be necessary to tap into the lucrative Trans-Atlantic and Asian markets and
facilitate greater diversification in its geographic portfolio.
5.4.4. Threats
Competitive response in long-haul market
When NAS commenced flights to Bangkok in 2013 it became the 8th European carrier, but the
first LCC, to serve the Southeast Asian market (CAPA, 2013b). It is also the only LCC providing
services from Europe to the North American market.
One of the key factors responsible for the initial success of LCCs was the fact that legacy carriers
did not view them as direct competitors based on the mistaken assumption that only a small group of
travellers would be willing to switch to LCCs (Lawton, 2002). While NAS’ long-haul operations
account for only around 1% of the total capacity on routes from Europe to Southeast Asia and the
U.S., and are not significant enough to change the complexion of the competitive landscape (CAPA,
2013c), it would behove the legacy airlines to respond aggressively to eliminate the threat before
NAS can obtain the necessary scale to become a serious competitor. Given the dire impact that their
initial ambivalence had on their market share and profitability in the short-haul market, it would be
incomprehensible for legacy carriers to repeat the same mistakes this time around.
Besanko et al. (2013) stated that one of the common competitive responses to the entrance of a
new competitor is for the existing firms to add capacity, lower prices and engage in a price war to
deplete the resources of the new entrant. This was the fate that ultimately befell SkyTrain as it was
unable to compete against the aggressive pricing from legacy airlines (Lawton, 2002). With NAS’
main source of competitive advantage being the low fares available on its flights, CAPA (2013c) has
found that NAS generates less than half the revenue per passenger on its long-haul routes when
compared to other airlines operating the same route. With the company struggling to reduce
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operating costs at the same rate as falling revenues, NAS’ long-haul operations have been a
significant drain on the company’s assets and resources, and caused the profitability of the company
to deteriorate dramatically (CAPA, 2015e). Therefore any added competitive pressures may prove
fatal for the long-term viability of its long-haul operations. After all, other successful LCCs such as
Air Asia X have tried and failed to penetrate the European long-haul market.
In addition to strategic responses, rival airlines will also resort to lobbying tactics to impede NAS’
entry into the intercontinental market. For example, airlines in the U.S., labour unions and members
of Congress have accused NAS of social dumping and being a “flag of convenience” even though
the incorporation of Norwegian Air International in Ireland was due to very sound operational
reasons; to gain access to the EU-U.S. Open Skies Agreement (CAPA, 2014b; Mouawad, 2014). The
fact that NAS will obtain cost savings by using some non-Norwegian crew in its long-haul operations
is irrelevant to whether it should be eligible for the U.S. air carrier permit. Despite filing the
application in 2013, NAS is still awaiting approval of its application as of December 2014.
The U.S. Department of Transportation’s undue delay in making a decision on the matter has
even raised concerns among EU regulators, who wholeheartedly believe that NAS is entitled to an air
carrier permit under the Open Skies Agreement (Cameron, 2014). After all, every airline tries to
minimise costs where possible to ensure that their operations remain economically feasible. It would
be absurd if Ryanair, an Irish company at its core, began flights to the U.S. and the same arguments
were raised against it.
Even if NAS does manage to fend off the legacy airlines and build a profitable long-haul
operation, it will only act as an invitation for other LCCs to rush into the market and potentially
erode any competitive advantage that NAS may have established. For example, Ryanair has
consistently floated the possibility of expanding into the Trans-Atlantic market with average fares
starting from below €100 (CAPA, 2015c). In addition, Lufthansa has announced its intention to
launch a low-cost long-haul service under the name “World Wings” in the autumn of 2015, targeting
leisure travellers on routes from Europe to North America, Caribbean and Southeast Asia
(McWhirter, 2014). Finally, Air Asia X was able to secure a deal for the acquisition of 50 new long-
range Airbus A330neo, and it has publicly stated its intention to target the Scandinavian market,
thereby directly challenging the routes offered by NAS (Woodgate, 2014). Since it has a much lower
CASK than NAS and possesses the key advantage of being able to provide greater onward
connections due to its extensive network within Southeast Asia, any re-entry by Air Asia X into the
European long-haul market could have dramatic consequences for NAS’ long-haul routes to and
from its Bangkok base.
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Dominance of the Large Airline Alliances
The formation of strategic alliances has been a competitive response employed by legacy carriers
with the objective of cutting costs, network expansion and to gain market access (Goetz and Shapiro,
2012). The three largest ones in operation today are OneWorld, Skyteam and Star Alliance. While
they cover about 55% of global capacity, they have an even tighter stranglehold on the Trans-
Atlantic market, with a combined market share of 87% (Marketline, 2015; p16). Therefore, airlines
within these global alliances have the size, scope and motivation to aggressively respond to NAS’
entry into the Trans-Atlantic market.
Overexpansion
NAS’ rapid ascent into one of the world’s largest LCC has been a remarkable success story. From
2007 to 2013, the company generated operating profit well above its peers in the industry. This
growth, however, has been funded by hefty capital expenditure. In 2014, NAS’ capital investment
amounted to 5 billion NOK, and for the sixth time in the last eight years, capital expenditure
exceeded operation cash flows (CAPA, 2015e). Its net debt also increased by more than two and a
half times from the previous year to 11.3 billion NOK. Therefore, there is a risk of overexpansion
that may cause NAS to endure liquidity problems unless its long-haul operations can generate better
operational performance going forward.
Carrier-within-Carriers
To combat the rising prominence of LCCs, legacy carriers have begun adopting a carrier-within-
carrier (“CWC”) strategy. It essentially refers to the establishment of a subsidiary with lower unit
costs than the parent company to be able to more effectively compete with LCCs on price and
defend market share (Lin, 2012). For example, in the Asia-Pacific region, Cathay Pacific (Dragonair),
Singapore Airlines (Scoot) and Qantas (Jetstar) all operate low-cost subsidiary airlines. Currently, the
CWC concept is being used by over 20 of the world’ largest airlines (Whyte and Lohmann, 2015b).
Graham and Vowles (2006) also believed that the CWC strategy can be used aggressively in order
to enter new markets and allow the legacy airline to more effectively segment the market according
to the predominant type of traveller on any given route.
Industry Consolidation
One of the new trends evident in the industry has been the consolidation among legacy carriers
leading to the formation of mega-airlines (Taneja, 2008a). Examples include the merger between U.S.
Airways and American Airlines in 2012, British Airways and Iberia in 2011, and KLM and Air France
in 2004. The key motivations for industry consolidation include the desire to combine financial
resources, aggressively cut costs and enhance revenue opportunities by combining hubs, routes, and
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marketing strategies (Demos, 2007). However, the empirical evidence suggests that the success rate
of airline mergers has been mediocre at best as they face a variety of challenges including the ability
to effectively integrate different computer systems, business cultures and flight operations (Palmeri,
2005; Brueckner et al., 2010). Indeed, as Tarry (2007) posited, size alone does not provide any
guarantee of value or success within the airline industry.
Nevertheless, CAPA (2015f) showed that there is a positive, linear correlation between market
concentration and profit margins. Consequently, the more fragmented market in Europe has limited
the profitability of airlines in the region. In the most concentrated market, North America, airlines
generated an EBIT margin of 8.5% when compared to just 2.5% in Europe.
Volatility in fuel price
In 2000, the average price of crude oil was $25 per barrel. By the middle of 2014, it was over
$110, representing a 340% increase (Airbus, 2014; p22). Since the peak of the oil price in 2014, it has
fallen almost 60% by the beginning of 2015. Even though the tumbling oil price has proven to be
valuable in reducing operating costs, the extensive use of hedging strategies within the industry
means that there will be a lag before airlines can fully reap the benefits from such a rapid decline.
Whether the prices remain at these depressed levels or experience a bounce in the near future,
the fact remains that fuel is a highly volatile commodity that is a significant expense that airlines have
no control over (Friedman, 2015). CAPA (2015g) stated that the oil price outlook is arguably the
most important macroeconomic uncertainty facing the airline industry in 2015, and will have a
substantial impact on core business strategies as well as operational profitability.
External events
The geographic dispersion of the global aviation industry means that it is exposed to an extensive
range of external factors that have the capacity to affect efficient airline operations, which have little
to do with industry structure or corporate strategy. For example, in the aftermath of the September
11 terrorist attacks in 2001, all commercial aircraft were grounded for three days in the U.S. and
triggered severe financial distress for most American airlines and a $5 billion aid package from the
U.S. government was required to stabilise the situation (Jang et al., 2011). Many travellers either
reduced or avoided travelling altogether as a result of the heightened perception of risk along with
the fact that the additional security measures not only added to the cost of travel, but also increased
the time and inconvenience for travellers. Pearce (2006a; p1) estimated that in the five months after
the attacks, demand reduced by over 30% in the U.S., and the impact of additional security measures
permanently reduced air travel demand by around 7% in the long-run.
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Medical epidemics have also had significant adverse effects on the financial performance of
airlines in the past. When the SARS epidemic hit China in 2003, North American airline bookings to
Hong Kong fell by more than 85% and Cathay Pacific reduced its weekly flight frequencies by 45%
(Orecklin, 2003). While the epidemic was rather constrained, with less than 800 deaths worldwide,
Pearce (2006b; p1) estimated that SARS reduced world GDP by $33 billion or 0.1%.
When a volcano in Chile erupted in 2011, it sent an ash cloud which circumnavigated the globe
and caused airlines to cancel flights on two separate occasions (Taylor and Perry, 2011). The eruption
of a volcano in Iceland during 2010 caused an estimated 100,000 flights to be cancelled, at a cost of
$1.7 billion to the affected airlines and leaving up to 10 million passengers stranded (Taylor and
Perry, 2011). During the worst days on 18th and 19th April, almost 30% of global passenger capacity
was cancelled (IATA, 2010b; p1).
Other significant events that have markedly disrupted airline activities include the Japanese
earthquake in 2011 (IATA, 2011b) and Hurricane Sandy in 2012 (IATA, 2012). Even mundane
events such as wind and snow have the ability to ground flights. In light of this, it is clear that the
industry is highly susceptible to exogenous shocks which artificially drive down industry profitability.
Airport Charges and Air Travel Taxes
When airlines are levied with large airport charges and air travel taxes, it reduces their profitability
and has the potential to adversely affect passenger volumes. These taxes and charges represent an
unavoidable cost for airlines and are completely out of their control. For example, as NAS continues
to expand London Gatwick as a home base, it will be subjected to the UK Air Passenger Duty,
which is the world’s largest single aviation tax (Tyler, 2014).
In the U.S., the 2014 fiscal budget proposed higher customs fees and passenger facility charges,
which would increase aviation taxes by $5.5 billion over and above the $19 billion paid by
commercial aviation in the prior year (Tyler, 2013; p27). These tax increases reflect the risk that the
airline industry is viewed as an important revenue generator for the funding of government budgets.
Finally, IATA (2013; p1) estimated that, in 2011, the use of airports and air navigation
infrastructure costed airlines and passengers over $92 billion, which was equivalent to almost 15% of
the cost of air transport. With passengers directly paying 47% of these costs, it demonstrates that
these taxes and charges are not only detrimental for the profitability of airlines but also directly
increase the cost of air travel.
5.4.5. SWOT Analys is Summary
The key elements of the SWOT analysis are summarised in Figure 23. NAS’ core strengths are
derived from its high levels of customer service, strong position within the Scandinavian market,
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innovation capabilities, competitive low fares and a growing, modern fleet of the newest generation
aircraft. By leveraging these strengths, NAS hopes to take advantage of the many opportunities that
will be prevalent within the aviation industry as a result of further liberalisation, improvements in
infrastructure and sustained growth in passenger numbers and route networks. Many of these
opportunities are going to be presented outside of the European market and have been a major
motivation for NAS to establish long-haul operations so that the company can be better positioned
to satisfy the growing demand for air travel within Latin America and Southeast Asia.
Like every other airline, NAS does suffer from certain weaknesses such as insufficient scale and
lack of affiliation with any of the large global airline alliances. These factors constrain its ability to
fully capitalise on the future opportunities as it is unable to provide its customers with the level of
route coverage and flight frequencies demanded. These weaknesses also make them more susceptible
to the threats inherent in the international aviation market such as the fact that an aggressive
response by legacy carriers in the long-haul market may drain NAS’ financial resources and force
them to exit the long-haul market. The trend towards industry consolidation and CWC strategies
pose additional threats as it dramatically changes the competitive landscape in which NAS operates
and will intensify internal rivalry and place greater pressures on profitability. Finally, while NAS
hopes to address its lack of geographic diversification by expanding into the long-haul market, until it
is able to achieve sufficient capacity on long-haul routes, it will still be highly vulnerable to external
events that occur within the European market, which may result in prolonged disruptions of flight
schedules.
Figure 23: SWOT Analys is Summary
Source: Own Creation
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5.5. VRIO Analys is
As Porter (1996) explained, the essence of strategy rests upon the ability to perform a set of
unique activities that set the company apart from its rivals. In this section, a VRIO analysis will be
conducted to build upon the previous section by examining NAS’ key resources and capabilities, and
discussing whether they are capable of providing the company with a source of sustainable
competitive advantage.
To do this, the VRIO framework will answer four interconnected questions relating to the
strategic resources and capabilities of NAS. The first of which is whether the resources and
capabilities have the potential to add value to the company; that is, if they are able to increase a
consumer’s willingness to pay for a product or service or to reduce the cost of serving customers
(Besanko et al., 2013). The second question concerns the rarity of the resource. This criterion will be
satisfied so long as the number of firms in possession of the resources is below the number
necessary to achieve perfect market efficiency (Barney, 2014). Rarity should not be mistaken for
uniqueness. Imitability is at the heart of the third issue. Besanko et al. (2013) outlined several factors
which may act as impediments to imitation; legal restriction, superior access to inputs, geographic
location closer to end consumers, economies of scale and casual ambiguity, which refers to the fact
that it is often difficult to identify the exact causal elements of a firm’s success. Finally, NAS must
formulate the necessary strategies in order to exploit the resources effectively so that the benefits can
be appropriated back into the firm (Barney, 2014).
Table 14 provides an overview of the VRIO framework and how organisational resources can
affect a company’s competitive position and the subsequent implications for firm performance. Two
separate analyses will be conducted to determine whether the competitive advantages enjoyed by the
company in the short-haul market are transferrable to its long-haul operations.
Table 14: VRIO Framework: Compet i t ive Impli cat ions & Firm Per formance
Valuable? Rare? Costly to Imitate?
Exploited by Organisation?
Competitive Implications Firm Performance
No No No No Competitive Disadvantage Below Average Yes No No Yes Competitive Parity Average Yes Yes No Yes Temporary Competitive
Advantage Above Average
Yes Yes Yes Yes Sustained Competitive Advantage Persistently Above Average
Source: Own Creation, adapted from Barney (2014)
5.5.1. Tangible resources
In terms of NAS’ tangible resources, it is in a strong financial position with a relatively clean
balance sheet and excellent internal fund generating based on its sustained period of operating profits
as well as the 20% ownership stake in Bank Norwegian. The company also possesses physical
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resources in the form of its modern fleet, where the average aircraft is less than four years old. With
pending orders in excess of 250 aircraft with both Boeing and Airbus, NAS will have a 350-strong
fleet once all those orders are fulfilled.
5.5.2. Intangible Resources
NAS’ intangible resources can be divided into technological innovations and brand reputation.
NAS has introduced several technological innovations, which has been able to enhance customer
satisfaction. Its in-flight Wi-Fi technology is patented and has been particularly well received by its
customers while the simple-to-use website has facilitated an effective Internet sales and distribution
channel. As far as NAS’ reputation is concerned, it has a strong brand name in Scandinavia, an
immaculate safety and the company has been able to foster some brand loyalty through the
Norwegian Rewards FFP.
5.5.3. Human Resources
The strong leadership team led by Bjørn Kjos is the key human resource that NAS possesses. Mr.
Kjos is an enigmatic leader and the face of the company. The Wall Street Journal even referred to
him as the “Norwegian Richard Branson”, one of the most successful entrepreneurs of the last
century (Sandstrom, 2013).
5.5.4. Capabi l i t i es
NAS has been able to leverage these resources into a vast array of capabilities that have acted as
the impetus for its prolonged period of growth in revenues, route network and fleet size. NAS is also
one of the cost leaders within the industry, which has allowed it to offer its passengers with low fares
relative to its competitors. Other capabilities include effective sales execution, award-winning
customer service and point-to-point flights. Figure 24 outlines NAS’ core resources and capabilities.
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Figure 24: Key Resources and Capabi l i t i es
Source: Own Creation
5.5.5. VRIO for Short-Haul Market
Sustainable Competitive Advantage
The VRIO analysis in Table 15 below shows that, in NAS’ short-haul operations, its strong
brand name and leadership provide the company with a source of sustainable competitive advantage.
Unlike Ryanair, who have embraced the mantra that any publicity is good publicity, NAS has sought
to enhance its brand reputation by fostering positive relationships with all stakeholders, especially
customers, employees and the government. Among its LCC peers and within the Scandinavian
market, this positive brand image is exceptionally valuable, rare and difficult to imitate.
Under the guidance of Bjørn Kjos, NAS has grown from a fledgling company with a fleet of
three aircraft leased from a rival to one of the largest LCC airlines. His leadership skills as well as his
strategic acumen have been one of the most critical factors in its success. By seizing upon the void
created in the market after SAS acquired Braathens, NAS was able to satisfy the desire by air
travellers in the Nordic market for a low-cost alternative to SAS.
Temporary Competitive Advantage
Sources of temporary competitive advantage arise when the resources and capabilities that a firm
possesses are valuable and rare, but are capable of being imitated by competitors in the future
(Besanko et al., 2013).
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In the case of NAS, the level of customer service provided by the company is rare in an industry
where the complexity of the operational processes in the provision of air services results in an
endless stream of consumer complaints about issues ranging from lost baggage to flight delays and
lack of legroom.
When NAS introduced in-flight Wi-Fi on its flights in 2011, it was the first European airline to
do so. Even through several years have passed, there are still only a handful of other airlines in the
European market that provide this service. Therefore, it is still scarce enough to equip NAS with a
source of temporary competitive advantage.
In the LCC segment, few airlines provide travellers with a FFP due to the cost of administering
the program. For example, neither of the two largest LCCs in Europe, Ryanair nor EasyJet, have
implemented a FFP. However, by rewarding its customers for repeated patronage, NAS is continuing
to build brand loyalty and goodwill. Therefore, this is a resource that is both valuable and rare
This section provided an analysis of how NAS can leverage its resources and capabilities to
develop competitive advantages in the short-haul and long-haul markets. Based upon our analysis of
the long-haul market, it is evident that NAS possesses a temporary competitive advantage in terms of
cost leadership, modern fleet, point-to-point flights, customer service and in-flight Wi-Fi. However,
these resources and capabilities are possible for other airlines to imitate and thus, they can be eroded
at any time. The only source of sustainable competitive advantage that we found was in the form of
the company’s strong leadership team. However, while this is difficult for other airlines to imitate,
even this could be viewed as fleeting in nature as Bjørn Kjos turns 69 in 2015 and may be
approaching the end of his tenure as CEO. If NAS fails to find a successor who is just as charismatic
and experienced, it could easily become a source of competitive disadvantage.
In addition, the long-haul operations lost the other source of sustainable competitive advantage
from the short-haul operations in the form of the company’s brand name and recognition within the
European market. Airlines spend significant amounts on marketing campaigns to build their brand
name and differentiate their product offerings in spite of the fact that consumers consider all airline
seats as virtually interchangeable commodities. That being the case, it adds another layer of
complexity to NAS’ long-haul operations as it must not only compete with the greater financial
resources and route networks of legacy airlines, but also the fact that legacy airlines also possess more
valuable brands in the eyes of American and Asian consumers.
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6. Recommendations
Since the internal analysis above indicates that NAS may not possess the necessary resources to
build a sustainable competitive advantage in the long-haul market as the company is presently
constituted, this chapter will provide some recommendations on how to address some of the issues
that the company has thus far faced in its long-haul expansion, and operational strategies that it may
wish to adopt in order to enhance its chances of success in the future (see Figure 25).
Figure 25: Recommendations
Source: Own Creation
6.1. Focus on Underserved Routes
For long-haul routes, Airbus (2014; p49) estimated that the feasibility threshold for airlines is to
carry at least 150 passengers per flight but they believe that it is unlikely that the industry will
continue to generate route growth at historical trends as long-haul traffic is highly concentrated at
existing hubs. Their analysis showed that the 42 megacities in international aviation, those with more
than 10,000 daily long-haul passengers, accounted for 94% of all long-haul traffic (Airbus, 2014;
p50).
Although that may be true, the empirical evidence of the experience of Asian LCCs demonstrates
that there is still potential to stimulate demand. For example, when Scoot began flying to Sydney
from Singapore, traffic volume grew by 43% in the subsequent 12 months (Rowland et al., 2014; p8).
The effect of Air Asia X was even more pronounced as the Kuala Lumpur to Adelaide route saw
growth in traffic of 287%.
Given that 85% of the long-haul market consists of leisure travellers (Sandstrom, 2013), NAS
should consider focusing on providing route combinations between cities that have appeal for
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European and Scandinavian travellers but are currently underserved by existing carriers or have no
long-haul services at all. This will take them out of direct competition with legacy carriers and find a
niche market which is not dependent on frequency, and where price is a more important factor in the
choice of airlines. Of particular interest to NAS should be the fact that the strongest growth on
routes is linked to the Asian region (Pearce, 2014). Therefore, it may seek to focus on expanding its
Scandinavia-Asia routes rather than its Trans-Atlantic operations.
In addition, given that there are over 4.5 million people with Norwegian heritage living in the
U.S., NAS should focus upon the people visiting friends and family to generate new demand. As a
guide, the states with the most number of Norwegian Americans are Minnesota, with over 850,000
while Wisconsin and Washington have more than 400,000 (Census, 2013). These destinations are not
served by direct flights from Scandinavia. Moreover, CAPA (2015i) has stated that there are many
large U.S. cities and popular tourist destinations that lack direct services to Europe, and especially
Scandinavia. As such, it provides a market opportunity for NAS since the routes do not necessarily
require high frequencies to be profitable.
6.2. Upgrade the Business Class Cabin
While NAS does offer a Premium Class cabin, it is unlikely that it will be able to attract the top-
end of the market with that product. Not only does it lack the same level of service that other
carriers possess, but business travellers will also be wary of the lack of frequency provided by NAS
on its long-haul routes. For example, it operates a measly four weekly flights from London to Los
Angeles as compared to BA, which has 4 direct departures daily, plus six additional indirect flights.
Without sufficient frequencies, it is unlikely that businesses will take the risk of having an important
executive stranded on another continent for several days before the next available departure.
In addition, NAS will be hampered by its lack of onward network connections in North America
and Asia, a problem that contributed to the failure of Oasis and Maxjet as they were unable to attract
the necessary number of business travellers to offset their highly discounted economy fares (Perrett
and Flottau, 2008).
Therefore, unless NAS is able to upgrade its business class service, it will be constrained in its
capacity to capture the market for business travellers, who account for approximately half of all
revenues on the Trans-Atlantic route, despite constituting only 14% of the traffic (CAPA, 2015c).
Even Michael O’Leary believes that NAS has erred in failing to offer fully-fledged business class
seats on long-haul flights as it is foregoing a massive source of revenue generation that may prove to
be impossible to overcome even if the airline is able to continue generate load factors in excess of
90% during peak periods (Economist, 2014; Baldwin, 2014).
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6.3. LCC All iances
Although the most successful LCCs have chosen to grow organically, without the assistance of
strategic alliances, the truth is that they are not that uncommon with about one-third of LCCs
globally being engaged in some sort of code-sharing agreement in 2011 (Morandi et al., 2015). Code-
sharing is a critical tactic in the long-haul market to enhance network coverage while controlling
competition and capacity at the route level (Dennis, 2004b). It effectively rationalises long-haul
networks by eliminating thin routes served at low frequency in favour of more frequency and
capacity to the key hubs.
Given that NAS lacks feed at the non-European end of its long-haul routes, engaging in alliances
with other LCCs in North America and the Asia-Pacific has the potential to expand NAS’ network
coverage, flight frequencies and enhance the potential for establishing a sustainable long-haul
operation. JetBlue has already expressed openness towards a potential interlining or code-sharing
agreement with NAS (Rowland et al., 2014). The interlining agreement may be particularly beneficial
as the experience of Air Asia X and Scoot has shown that the convenience offered by properly
structured connections is preferred by passengers as opposed to the logistical hassle associated with
self-hubbing (Rowland et al., 2014).
Moreover, if NAS decides to remain unaffiliated, it will likely continue to come up against
significant political resistance whenever it enters a new region. One of the key advantages offered by
strategic alliances within the airline industry is that it helps to overcome cultural and political
boundaries by bypassing the regulatory constraints on market access and foreign ownership that is
still prevalent throughout the industry (Doganis, 2001).
If NAS fails to engage in a LCC alliance, its limited long-haul network may compel it to become
a niche player that focuses on serving ethnic flows from Scandinavia to North America and leisure
travellers during the summer months, which are better able to be sustained on lower frequencies
(Dennis, 2004b).
During the formative stages of NAS’ short-haul operations, interlining agreements were
established with Cimber Sterling and FlyNordic. Therefore, there is precedence for cooperation with
other LCCs. Using the Spectrum of Airline Cooperation, we believe that there is no need for NAS to
engage in merger-like integration (see Figure 26). There should be just sufficient cooperation to allow
NAS long-haul to expand route network and provide connection options for passengers flying from
Europe to the U.S. and Asia.
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Figure 26: Spectrum of Air l ine Cooperat ion
Source: Own Creation, adapted from Pearce and Doernhoefer (2011)
6.4. Market ing Strateg ies
Curry and Gao (2012) found that LCCs have been able to modify customer behaviour by
inducing them to accept fewer benefits and service levels in return for lower prices. Nevertheless,
Taneja (2008b) believed that the commodity nature of the airline business dictates that airlines must
develop a deep understanding of passenger needs and how their priorities are changing, and then
incorporate this knowledge into their marketing campaigns in order to increase intention to purchase
and create a value proposition that is emotionally appealing.
NAS should stress the uniqueness of its value proposition in the sense that it is able to offer
competitive low fares with exceptional service offerings through its award-winning customer service
team and in-flight Wi-Fi. Moreover, the company should continue to provide services that are
demanded by its customers with schedules that fit their time demands at prices that travellers are able
to afford. Of particular interest to NAS is the fact that it has been found that price elasticity is higher
on short-haul routes than long-haul routes (Smyth and Pearce, 2008). As such, focusing on gaining a
competitive advantage on the basis of price leadership may not be as effective in the long-haul
market.
In addition, a study conducted by Jiang (2013) found that assurance; the degree to which
travellers feel safe travelling with an airline to be the most important factor for customers flying low-
cost long-haul routes with Jetstar and Air Asia X in the Asia-Pacific. This provides a very clear area
where NAS can exploit. It has an impeccable safety record, which has not been properly mobilised
and appropriated into its marketing strategies yet. If NAS can effectively adapt its marketing
strategies to leverage upon the desire of passengers to feel safe, it will be able to gain a potential
competitive edge over its competitors.
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6.5. Antic ipate New Rivals
NAS currently enjoys the advantage of being the first mover in the low-cost long-haul market
within Europe. However, if it is able to achieve success in the market, there will invariably be
imitators and competitors that may be able to match or even beat the fares that it currently offers.
Air Asia X is an airline that is currently offering a similar service in the Asia-Pacific and has
experience with the low-cost long-haul model. Through the comments of its CEO, Tony Fernandes,
Air Asia X has already recognised the opportunities inherent in the Scandinavian market and the
demand for affordable holidays to popular Southeast Asian destinations such as Bangkok and Kuala
Lumpur (Woodgate, 2014).
Therefore, NAS should come up with contingency plans to ensure that, when other LCCs enter
the market, it will be able to adapt its business model successfully to maximise its strengths and ward
off rivals from infringing upon its profitability and market share. In such a highly dynamic industry,
flexibility is a vital competence that will enhance the long-term competitiveness of NAS. By being
agile, NAS will avoid becoming overly dependent on a particular competency, business model or
geographic region, which may prove to be extremely detrimental in its plans to expand into the long-
haul market as it may blind the company to new opportunities created by changing industry
dynamics.
6.6. Grow Revenues and Prof i t s Concurrent ly
While NAS has been able to constantly grow its revenue streams, 2014 marked a year in which it
suffered significant operating losses. Wensveen (2007) stated that, while revenue growth is important,
bottom line growth is essential to the survival of any airline. NAS should avoid the mistake of simply
focusing on revenue growth while neglecting actual profits or losses. If the company is unable to
generate profits from the long-haul operations in the first several years of operation, it should
seriously re-evaluate the strategy and decide if continuing to invest in the long-haul operations will be
shrewd strategic decision or whether it should cut its losses and refocus the company’s strategic
direction back onto its core short-haul network.
The checked history of low-cost long-haul airlines provides important lessons for NAS in this
regard as many have simply focused on expanding passenger traffic and revenues, while consistently
running operating losses. Eventually, those airlines were swallowed up by high debt levels and lack of
liquidity. This is important for NAS, whose current ratio, as shown in section 5.2.3., is much weaker
than many of its peers, especially Ryanair. This elevates the risks associated with liquidity issues
should the performance of the long-haul services continue to fail to meet expectations.
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In addition to the failures of low-cost long-haul operators, many established legacy carriers have
struggled to make their long-haul operations profitable. For example, QANTAS has persistently
generated significant losses in its long-haul operations, only to be propped up by the profits of its
domestic network. For the financial year ending June 2014, QANTAS Domestic generated profits of
AU$30 million while QANTAS International suffered a loss of AU$497 million (QANTAS, 2014).
6.7. Control l ed Expansion
NAS’ order of 222 aircraft in 2012 was the largest in European history and as such, it was able to
alleviate fears that the company would be undercapitalised as it continues to expand its route
network internationally. However, there is also the risk posed by overexpansion as discussed in
section 5.4.4. Therefore, the company must find the right level of critical mass to balance the
demand that it expects to generate and the services that it can realistically offer at this relatively early
stage of the company’s intercontinental growth. Overloading the market with extra capacity would
not be a wise strategy as legacy carriers have much bigger financial reserves and may be willing to
wage a price war that NAS would be hard pressed to win.
6.8. Leadership
Currently, NAS possesses a strong leadership team, led by Bjørn Kjos. However, he is
approaching 70 years old and cannot remain at the helm of NAS into perpetuity. Therefore, the
company should start planning for the time when he retires and a new CEO will need to be installed.
If the right candidate can be found, whether internally or externally, it will sustain NAS’ competitive
advantage and position the company to take advantage of future opportunities. However, failure to
do so will turn what is currently a source of sustainable competitive advantage into a source of
competitive disadvantage and heighten the risks that are prevalent throughout the industry.
Wensveen (2007) used the example of Continental Airlines to emphasise the importance of
leadership. The company was turned from one that was bankrupt to one of the most successful
airlines in the U.S. market after the management team was restructured with Gordon Bethune
instilled as CEO. The new management implemented a set of strategies that maximised its strengths
and seized upon the opportunities that the changing dynamics of the industry offered.
6.9. Summary
This Chapter sought to provide a list of recommendations that NAS may consider adopting in
order to achieve the same level of success in the long-haul market as it has in the short-haul market.
One of the keys is for NAS to remain agile, anticipate new rivals and be willing to adapt its business
model to stay ahead of its competitors in the dynamic airline industry. Some strategic decisions that it
might make in this regard is to enter into a LCC Alliance to augment its own route network to
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provide better onward connections for long-haul travellers, and to focus on the underserved routes
between Scandinavia and Asia, which have much lower weekly seat capacities when compared to
routes to the U.S. and routes to/from the London base. NAS should also seriously consider
upgrading its Premium Class offering to a full Business Class Cabin to capitalise on the revenue
streams that business travellers offer on long-haul routes, and to help NAS offset the trend of falling
RASK since the introduction of its long-haul operations in 2013.
Other factors that NAS needs to keep in mind are that it should not ignore profitability in this
growth phase and that a controlled expansion over a period of several years will provide NAS with a
better foundation for success than immediately flooding the market with extra capacity. It is also
imperative that NAS develops a suitable succession plan for Bjørn Kjos so that the company can
continue to execute his strategic vision even after his inevitable retirement.
7. Conclusion
Given the success that LCCs have achieved in penetrating the market share held by legacy
carriers in short-haul markets, a constant source of speculation within the industry has been whether
they will be able to translate the same level of success to the long-haul market. Through a case study
of NAS, we have sought to provide an insight into the strategies adopted by NAS in its long-haul
expansion and whether it has been able to achieve sustainable competitive advantages, through price
or its other resources and capabilities.
At the beginning of the thesis, we proposed two main research questions of interest. The first
one being: “why has the low-cost business model been so successful in the short-haul market but mostly been a failure
in the long-haul market?”
Through the Literature Review Chapter, we found that most previous studies believe that LCCs
are not able to achieve the same level of cost advantage in the long-haul market as they have in the
short-haul market. In particular, LCCs will have to adapt some of the core features of the low-cost
business model to compete effectively along long-haul routes. This includes rearranging the
configuration of their aircraft to include premium class cabins, shifting their operations to primary
airports that are more congested and charge higher fees for slots, the provision of more frills to
avoid disgruntled passengers, adding cargo services to long-haul flights and restructuring of its route
network to provide more seamless transfers for long-haul passengers. All of these factors have the
effect of reducing aircraft capacity, increasing costs and fundamentally changing the operations of
LCCs. As a result, this is a primary reason why most LCCs have sought to grow their routes within
the short-haul market and will not expand beyond that until competitive developments compel them
to.
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In the External Analysis Chapter, we found that the politics and economics of long-haul
operations are much more challenging. Even though deregulation has been prevalent throughout the
airline industry in the last three decades, international aviation today is still far from being a free
market. Regulations still dominate many aspects of the industry through the complex set of bilateral
agreements. Political sensitivities dictate that the nationality of airlines still plays an important role in
gaining market access and government subsidies. These are issues that LCCs have been fortunate
enough to avoid in short-haul routes within the U.S. domestic market and EU Open Aviation Area.
Moreover, the high capital costs required to expand into the long-haul market in terms of new
airport slots and investment in long-range aircraft as well as the increasing importance of price
discrimination means that LCCs must start anew in their quest to challenge the dominance of legacy
carriers in the long-haul market. From the perspective of the Porter’s Five Forces framework, the
higher operating costs associated with labour and fuel, the increased bargaining power of business
travellers, and incumbency advantages possessed by legacy carriers make it more difficult for LCCs
to penetrate the long-haul market.
Given these obstacles inherent in expanding into the long-haul market, our second research
question was: “how does NAS adapt its low-cost business model to gain a sustainable competitive advantage in the
long-haul market?”
From the overview of NAS’ history, we can see that the company has successfully built its
operations since its inception in 1993 to the point where it is the third largest LCC in Europe, behind
only Ryanair and EasyJet. It has invested heavily in fleet expansion in recent times to continue to
expand its route network and flight frequencies, and catapult the company into the next stage of its
expansion plans.
When we look at the financial performance of NAS, it is evident that, in nominal terms, the
company has been an above-average performer in the last decade, with consistent profits from 2005
until 2013. However, when we compare its performance with a peer group consisting of Ryanair,
EasyJet, Air Berlin and Air Asia X, it is reasonable to conclude that NAS may have rushed into its
long-haul expansion as Ryanair and EasyJet are superior performers in terms of liquidity, financial
performance and operational efficiency. Yet these two airlines have remained on the sidelines with
regards to expanding their networks into the long-haul market. The two LCCs currently commencing
long-haul operations, Air Asia X and Air Berlin, have generated negative net profit margins in the
last couple of years and have higher CASK than RASK, an indication of negative operating profits.
Given that NAS generated a net loss of €126 million in 2014, a figure slightly smaller than the €142
million that the company accrued between 2010 and 2013, it is clear that the long-haul operations
have been a drain on the company’s resources and a drag on its profitability.
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Given the high level of risk involved with this venture, NAS needs to make sure that it adopts
the right strategies in order to provide itself with the best chance of success, rather than joining the
long list of low-cost failures in the long-haul market. Specifically, NAS focused upon changing a
couple of key elements of its short-haul model including the acceptance that cargo and premium
class cabins are two important sources of revenue that it cannot ignore in the long-haul market.
However, it has stuck with the fare structure inherent in the short-haul market, whereby passengers
must pay extra for services that are included in the base fare of legacy carriers. In addition, NAS
refuses to provide passengers with connecting services, even onto its own short-haul network in
Europe.
From the SWOT analysis, it is evident that NAS possesses a range of strengths that it may
leverage in its long-haul expansion such as its cost leadership, in-flight Wi-Fi, brand name and
modern fleet. However, when we conducted a VRIO analysis of these resources and capabilities, we
found that NAS possessed only one sustainable competitive advantage in the form of the strong
leadership provided by Bjørn Kjos. Its other major resources are either sources of temporary
competitive advantage or competitive parity. That provides an insufficient foundation for succeeding
in the long-haul market as NAS’ insufficient scale and lack of affiliation with one of the three major
global alliances mean that it is highly vulnerable to an aggressive response by rival airlines and the
negative effects of fuel price volatility and external shocks.
7.1. Impli cat ions
Given the above analysis, there are several implications that can be drawn from this case study.
Firstly, although our price comparison found that NAS has failed to generate a significant price
advantage, especially on its LowFare+ product, it has still generated load factor of above 90% on its
long-haul routes so far. This shows that there is a strong demand for the services that NAS is
providing; a direct service from Scandinavia to the U.S. and Bangkok, routes which are currently
underserved by existing carriers. Therefore, NAS might consider abandoning London as a long-haul
base as it already possesses sufficient capacity for both leisure and business travellers. Instead, NAS
should focus upon serving customers in the Scandinavian market. Routes to the U.S. should target
the segment of people who travel to visit friends and family by providing direct services to cities such
as Minnesota, while Asian destinations should target leisure travellers.
Secondly, the premium class price analysis showed that NAS’ current Premium Economy
offering does not provide the company with a point of differentiation as it is not measurably cheaper
than the Premium Economy products of rival airlines and does not attract the high margins offered
by Business Class cabins. Therefore, we believe that NAS should eschew the current Premium
Economy cabin and focus upon providing a product that satisfies the needs of business travellers so
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that it is able to benefit from the large revenue streams that business travellers provide. Of course,
establishing a client base and building relationships with big business will be a key component in this
strategy.
NAS should also seriously consider entering into alliances with other LCCs. As the situation
currently stands, NAS cannot provide nearly enough destinations within its long-haul network to be
a serious competitor. An alliance in the form of interlining agreements or code-sharing, while
increasing administration costs, will immediately increase the size of NAS’ international network and
make it a much more attractive option for travellers whose final destination is not New York,
Bangkok or Los Angeles.
The final key takeaway is that NAS was probably not the ideal candidate to launch such an
ambitious expansion plan. The company does not have the level of financial resources or liquidity as
other LCCs such as Ryanair to withstand the capital expenditure required and maintain a financial
buffer should the initial operations not perform up to expectations. It also lacks the necessary
number of long-range aircraft to offer sufficient frequencies and compete effectively in the long-haul
market. Therefore, the long-haul operations are very vulnerable to retaliation by legacy airlines and
NAS may not be able to withstand a prolonged price or capacity war, nor would it be well-positioned
to overcome any unforeseen circumstances such as further delays in the delivery of its Dreamliners.
That is not to say that NAS’ long-haul expansion will be a failure. The management team has
consistently demonstrated ambitious expansion plans throughout its short history that has served the
company well. NAS should be applauded for being forward-thinking and becoming the only LCC to
operate low-cost long-haul flights from Europe. However, without a significant price advantage, the
odds are well and truly against the company given the weight of history and the fact that legacy
carriers will do their utmost to disrupt NAS’ entry and dissuade other LCCs from following suit.
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